It’s that time, April is coming up fast and many people start stressing. Let’s go back to the basics to better understand W-2’s so you don’t have to worry about the word, Deadline.
It’s that time, April is coming up fast and many people start stressing. Let’s go back to the basics to better understand W-2’s so you don’t have to worry about the word, Deadline.
What is a W2?s
A W-2 is a tax form used in the United States to report an employee’s annual wages and the taxes withheld from those wages. Employers are required to provide their employees with a W-2 form by January 31st each year. The W-2 form includes information such as the employee’s total wages earned during the year, the amount of federal, state, and local income taxes withheld from their paycheck, and the amounts of Social Security and Medicare taxes withheld. Employees use this information to file their federal and state income tax returns.
What if I still don’t have my W-2?
If you do not receive your W-2 form by January 31st, you should first contact your employer to inquire about the status of your W-2. It’s possible that your employer may have sent it to the wrong address or there may be some other delay.
If you still do not receive your W-2 form by mid-February, you should contact the IRS for assistance. You can call the IRS at 1-800-829-1040 and they will contact your employer on your behalf to request a copy of your W-2.
Filing and Extension| Form 4868
Form 4868, also known as the Application for Automatic Extension of Time to File U.S. Individual Income Tax Return, is a tax form used by taxpayers in the United States to request an automatic extension of time to file their federal income tax return.
If you are unable to file your tax return by the April 15th deadline, you can use Form 4868 to request an automatic extension until October 15th. However, it’s important to note that Form 4868 only extends the time to file your tax return, not the time to pay any taxes owed. You must still estimate and pay any taxes owed by the April 15th deadline to avoid penalties and interest charges.
Disclaimer: The information provided above is not meant to be legal or tax advise. You should consult your CPA and attorney to determine the best course of action for your situation.
Mitzi E. Sullivan, CPA is a cloud based professional services provider specializing in cloud accounting.
Form W-4, formally known as “Employee’s Withholding Certificate,” is a form created by the IRS that informs employers how much tax to withhold from each of their employee’s paycheck. This form is used to calculate payroll tax withholdings in order to remit these taxes to the IRS and state (if applicable), on the employee’s behalf.
Step 1: Fill out your personal Information
Fill out your legal name, address, Social Security number and tax-filing status.
Step 2: Accounting for multiple jobs
If you or your wife (if you file jointly) is working more than one job or have self-employed income, see below to get accurate withholding:
The W-4 for the higher paying job, fill out steps 2 to 4(b) of the form and leave those steps blank for the other jobs.
If you are your spouse both earn the same amount and are married filing jointly, you can check the box associated with Step 2(c) “If there are only two jobs total…”. Please note, however, that both spouses need to fill out their W-4s if you check this box.
If you are filling out your W-4 and don’t want your employer to know that you have a second job or other income, there are a few options, including:
On line 4(c), you can instruct your employer to withhold an extra amount of tax from your paycheck; or
Don’t factor your extra income into your W-4, but instead, send in estimated tax payments to the IRS yourself.
Step 3: Claiming dependents, including children
If you have kids and dependents and your total income is under $200,000 ($400,000 married filing jointly), you can enter the number of dependents (including children) and multiply them by the credit amount for the corresponding year. See this overview for the IRS Rules for Claiming a Dependent.
Step 4: Personalizing your withholdings
If you want to either withhold extra tax because you would rather overpay and receive a refund or you expect to claim deductions other than the dependents in Step 3 and the standard deduction,
Step 5: Turn in your W-4
Sign and date your W-4 and turn it into your employer’s payroll or human resource team.
Disclaimer: The information provided above is not meant to be legal or tax advise. You should consult your CPA and attorney to determine the best course of action for your situation.
Mitzi E. Sullivan CPA, PLLC is a cloud based professional services provider specializing in cloud accounting.
An S Corporation is a type of business structure that combines the benefits of a corporation and a partnership. S Corporations have become popular among small business owners due to the tax and liability advantages they offer. In this blog, we will explore the pros and cons of forming an S Corporation.
What is an S Corporation?
An S Corporation is a type of business structure that combines the benefits of a corporation and a partnership. S Corporations have become popular among small business owners due to the tax and liability advantages they offer. In this blog, we will explore the pros and cons of forming an S Corporation.
An S Corporation is a type of business structure that combines the benefits of a corporation and a partnership. S Corporations have become popular among small business owners due to the tax and liability advantages they offer. In this blog, we will explore the pros and cons of forming an S Corporation.
Pros of an S Corporation:
Pass-Through Taxation: One of the biggest advantages of an S Corporation is its pass-through taxation. This means that the company’s income, deductions, and credits are passed through to the shareholders, who then report it on their individual tax returns. This avoids the double taxation that shareholders in C Corporations experience.
Limited Liability Protection: Like a corporation, an S Corporation provides limited liability protection to its shareholders, meaning their personal assets are protected in the event of a lawsuit or bankruptcy.
Saving SE Taxes: S Corporation tax structure allows an active shareholder to pay themselves a salary for the work they provide. The remainder of the net income from the S Corp allocated to the shareholder avoids self-employment taxes.
Cost-Effective: Forming an S Corporation is relatively cost-effective compared to forming a traditional corporation.
Cons of an S Corporation:
Complexity: Forming an S Corporation can be complex and time-consuming, requiring legal and tax compliance paperwork. Each year, an 1120S tax return is required to be filed to the IRS which is an additional accounting expense.
Restrictions on Shareholders: S Corporations have strict restrictions on shareholders, including a limit on the number of shareholders and the types of shareholders allowed.
Limited Deductible Losses: Shareholders of an S Corporation may only deduct losses to the extent of their basis in the company.
In conclusion, an S Corporation offers several benefits, including pass-through taxation, limited liability protection, and saving on self-employment taxes. However, it also has its drawbacks, such as complexity, restrictions on shareholders, and limited deductible losses. Before deciding to form an S Corporation, it’s important to carefully weigh the pros and cons and seek the advice of a tax professional.
Disclaimer: The information provided above is not meant to be legal or tax advise. You should consult your CPA and attorney to determine the best course of action for your situation.
Mitzi E. Sullivan, CPA is a cloud based professional services provider specializing in cloud accounting.
In 2018, the Supreme Court overruled the previous ruling that states can only require sellers to collect tax when they have a physical presence in the state. Now, states can require tax collection responsibilities on sellers who have an economic presence without a physical presence.
Many online retailers sell products all over the United States. Out of state sales without a physical presence can still trigger tax obligations in other states. Most states have economic nexus which is a threshold set by the state requiring the out of state seller to collect and remit sales tax. Economic nexus is triggered by reaching a certain amount of sales and/or number of sales transactions in another state.
If you reach any of the nexus thresholds, you must collect and remit sales tax in those states. If you do not reach the nexus threshold, you will collect and remit sales tax in the state your business is located in.
Disclaimer: The information provided above is not meant to be legal or tax advise. You should consult your CPA and attorney to determine the best course of action for your situation.
Mitzi E. Sullivan, CPA is a cloud based professional services provider specializing in cloud accounting.
When all the partners don’t agree on what to do with the proceeds from the sale of real property, executing a “drop and swap” allows real estate investors to “drop” real property ownership from the LLC to individual partners as tenants in common (TIC) prior to selling the real property. The “drop” to individual partners as TIC should take place prior to the sale, allowing as much time as possible for the property to be “held for business or investment purposes” by the individual tenants. As with all 1031 exchanges, there is no clear rule in the tax code about how long before a sale the property must be owned by the tenants in common.
When the property is sold (the “swap”), the proceeds are divided among the TIC. Each individual can then decide whether to cash out and pay taxes or reinvest into another investment property and continue to defer taxes.
Revenue Ruling 77-337 and Revenue Ruling 75-292 provide examples of exchanges that were disqualified due to transfers which occurred immediately before or after an exchange from or to an entity controlled by the taxpayer.
Partners will want to ensure that the partners not involved in the 1031 Exchange (those that want to cash out) truly drop their interests in the partnership. If not, the IRS may recharacterize their TIC interests to partnership interests. Refer to Rev. Proc. 2002-22 for minimum “drop and swap” criteria.
Be aware of two questions on the Form 1065, Schedule B:
Question 13 asks
“…during the current or prior tax year, the partnership distributed any property received in a like-kind exchange or contributed such property to another entity (other than entities wholly-owned by the partnership throughout the tax year)”
Question 14 asks
“At any time during the tax year, did the partnership distribute to any partner a tenancy-in-common or other undivided interest in partnership property?”
It is best to negotiate and take title as individuals rather than entities.
Disclaimer: The information provided above is not meant to be legal or tax advise. You should consult your CPA and attorney to determine the best course of action for your situation.
Mitzi E. Sullivan, CPA is a cloud based professional services provider specializing in cloud accounting.
Active Income (wages, business where the taxpayer is materially participating, etc.)
Passive Income
There are two kinds of passive activities.
1. Trade or business activities in which you don’t materially participate during the year
2. Rental activities, even if you do materially participate in them, unless you’re a real estate professional
3. Portfolio Income (royalties, capital gains, interest, qualified dividends, etc.)
How is Active Income is taxed? Ordinary tax rates plus self employment tax (SS and Medicare tax) of 15.3%.
For employees, SS and Medicare is automatically taken out of your paycheck and split 50/50 with employer. For someone who is self employed or active in a business, they must pay both halves of the SS and Medicare, known as self employment tax.
How is Passive Income taxed? Ordinary tax rates with no self employment tax. Subject to Net Investment Income Tax (NIIT) of 3.8% if your AGI is above the threshold of $250,000 for MFJ.
How is Portfolio Income taxed? Ordinary tax rates or preferential rates for LTCG and qualified dividends.
So this might seem that having passive income is better than active income. NOT NECESSARILY.
Losses: When you are an owner in a pass through entity (partnership, S Corp), you need to be careful with how you categorize your participation in the business because if the company is generating losses, you may not get to take them.
Passive Activity Losses (PALs): When a taxpayer has a loss from a passive activity, it can only offset passive income, NOT active income.
Example of passive investor and passive activity loss limitations:
Pete is an individual taxpayer who owns a 25% interest in an LLC. He is categorized as a limited partner and his 25% ownership interest is just an investment as he does not participate in the day-to-day managerial decisions of the business. This means that Pete is a passive partner. The LLC generated a $100,000 loss, $25,000 allocated to Pete on his Schedule K-1. Pete has a full time job where he makes a salary of $100,000.
It would appear that Pete can offset his $100,000 income from his W-2 with his $25,000 loss from his Schedule K-1, however, because the loss is passive and the income is active, Pete cannot deduct the $25,000 loss until he has passive income. Therefore, the loss rolls forward until the LLC generates income in a future year, or Pete has passive income from another income stream.
How do you qualify as material participation?
You participated in the activity for more than 500 hours.
Your participation was substantially all the participation in the activity of all individuals for the tax year, including the participation of individuals who didn’t own any interest in the activity.
You participated in the activity for more than 100 hours during the tax year, and you participated at least as much as any other individual (including individuals who didn’t own any interest in the activity) for the year.
The activity is a significant participation activity, and you participated in all significant participation activities for more than 500 hours. A significant participation activity is any trade or business activity in which you participated for more than 100 hours during the year and in which you didn’t materially participate under any of the material participation tests, other than this test. See Significant Participation Passive Activities under Recharacterization of Passive Income, later.
You materially participated in the activity for any 5 (whether or not consecutive) of the 10 immediately preceding tax years.
The activity is a personal service activity in which you materially participated for any 3 (whether or not consecutive) preceding tax years. An activity is a personal service activity if it involves the performance of personal services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, or any other trade or business in which capital isn’t a material income-producing factor.
Based on all the facts and circumstances, you participated in the activity on a regular, continuous, and substantial basis during the year.
Rental Activities
Rental activities are always passive unless you are a “Real Estate Professional.” There is a special $25,000 allowance for a taxpayer who actively participates in a passive rental real estate activity. So you can deduct up to $25,000 of passive loss against active income if you are deemed to have “actively participated” in the rental real estate activity.
Active participation- not the same as material participation. Active participation is a less stringent standard than material participation. Examples of active participation (management decisions, approving new tenants, deciding on rental terms, approving expenses, etc.).
**So basically any taxpayer can easily qualify as active participation as long as they are making high level decisions for the rental.
Real Estate Professional Status
You qualified as a real estate professional for the year if you met both of the following requirements.
More than half of the personal services you performed in all trades or businesses during the tax year were performed in real property trades or businesses in which you materially participated.
You performed more than 750 hours of services during the tax year in real property trades or businesses in which you materially participated.
Disclaimer: The information provided above is not meant to be legal or tax advise. You should consult your CPA and attorney to determine the best course of action for your situation.
Mitzi E. Sullivan, CPA is a cloud based professional services provider specializing in cloud accounting.
The two primary accounting methods are accrual and cash basis
The main difference between the two methods is the timing of when expenses and revenues are recognized. There are advantages and disadvantages to both methods, so depending on your company’s operations and goals, you can decide which method best aligns with your company’s needs and preferences.
Consult with a Certified Public Accountant or tax professional to ensure the appropriate accounting method is used.
Accrual Accounting
Under this method, revenue is recognized when a sale transaction occurs and expenses are recognized when the purchase of goods or services occur, regardless of whether any cash was received or dispersed.
The Accrual method is more complex but provides a more accurate picture of a company’s financial position due to its recognition of payables and receivables. However, because some transactions are recorded before cash is actually received, a company’s revenue books will not be aligned with the current amount of cash in their bank account.
The Accrual method is most commonly used by publicly traded companies that are required to receive a financial audit and is accepted under the Generally Accepted Accounting Principles (GAAP).
One example of revenue recognition under the Accrual method: You work for a landscaping company, you mulched a lawn for a client and you invoice the client $200 on December 31. You will recognize revenue on December 31 because the service was performed that day, regardless of whether you received a form of payment from the client.
Cash Accounting
This method is known for its simplicity of keeping track of cash flow because revenue and expenses are accounted for only when cash is received or dispersed.
The Cash method gives you an accurate picture of the cash in your bank account today but does not account for payables or receivables; therefore, the risk of overstating the health of a company is present and does not provide an accurate representation of a company’s financial position. Typically, this method is most used for small businesses and sole proprietorships.
The Cash method is not acceptable under the Generally Accepted Accounting Principles (GAAP).
One example of a revenue recognition under the Cash method: Let’s use the same example from above. You work for a landscaping company, you mulched a lawn for a client, and you invoice the client $200 on December 31. You do not recognize revenue on December 31, because you have not received any form of payment. You will record revenue on the day you receive cash, a check, or a credit card payment from the client for your mulching services.
Why is it important to choose the correct accounting method?
It is useful to track your cash flow and understand the future of your company’s financial position
It is important for tax purposes in order to determine the accurate amount of annual taxes you will need to pay to the Internal Revenue Service (IRS)
It is important to ensure compliance of state and federal regulations. Some states have a preferred accounting method to be used by businesses
Can a company change its method of accounting?
Yes, but a tax return must be filed and approved by the Internal Revenue Service (IRS) before changing its accounting method. To make this legal change, Form 3115, Application for Change in Accounting Method, must be filed by the taxpayer.
Disclaimer: The information provided above is not meant to be legal or tax advise. You should consult your CPA and attorney to determine the best course of action for your situation.
Mitzi E. Sullivan, CPA is a cloud based professional services provider specializing in cloud accounting.
The IRS Forms 1099 are a series of forms used to report certain types of income that do not come from a direct employer in the form of wages, salaries, tips, etc. The most common is Form 1099-NEC (nonemployee compensation), frequently used by small business owners.
The primary purpose of these forms is to give nonemployees (contractors or subcontractors) a record of total annual payments they received and need to report during tax time. When paying a nonemployee, businesses do not withhold or pay any employer taxes on those payments. When tax time comes, each individual or business who has received a 1099 is required to report this income and pay any related taxes.
Businesses and Individuals Required to file Forms 1099
If a business pays $600 or more in compensation through the year to a contractor or other nonemployee, the business is required to send copies of Form 1099-NEC to the IRS and payees. This form is typically issued to individuals, sole proprietors, partnerships, interest payees, rent payees, and single member LLCs (businesses are not required to send a 1099-NEC to S and C corporations). However, all attorneys receive a 1099, even if they are an S or C corporation.
The due date for filing a copy of a 1099 with the IRS and providing a copy to your contractors and vendors is January 31 for most businesses. If the business is not filing Forms 1099-NEC, the due date to submit any other type of 1099 is February 28. If either of these dates is on a weekend, the deadline falls on the following Monday.
Information required to file a 1099
Have all contractors complete a Form W-9. This will request their full name, social security number, and address (if it is an individual) or their business name, EIN, and address (if it is a business).
A total of all payments made to the nonemployee (contractor) throughout the year.
Electronic Filing Update – New IRS Portal
The IRS is scheduled to launch a new internet filing portal in early January 2023. Under Section 2102 of the Taxpayer First Act, the IRS is developing an internet portal that will allow taxpayers to electronically file Forms 1099 after December 31, 2022. Reference part F of the IRS Instructions for additional information.
Disclaimer: The information provided above is not meant to be legal or tax advise. You should consult your CPA and attorney to determine the best course of action for your situation.
Mitzi E. Sullivan, CPA is a cloud based professional services provider specializing in cloud accounting.
Active Income (wages, business where the taxpayer is materially participating, etc.)
Passive Income
There are two kinds of passive activities.
1. Trade or business activities in which you don’t materially participate during the year
2. Rental activities, even if you do materially participate in them, unless you’re a real estate professional
3. Portfolio Income (royalties, capital gains, interest, qualified dividends, etc.)
How is Active Income is taxed? Ordinary tax rates plus self employment tax (SS and Medicare tax) of 15.3%.
For employees, SS and Medicare is automatically taken out of your paycheck and split 50/50 with employer. For someone who is self employed or active in a business, they must pay both halves of the SS and Medicare, known as self employment tax.
How is Passive Income taxed? Ordinary tax rates with no self employment tax. Subject to Net Investment Income Tax (NIIT) of 3.8% if your AGI is above the threshold of $250,000 for MFJ.
How is Portfolio Income taxed? Ordinary tax rates or preferential rates for LTCG and qualified dividends.
So this might seem that having passive income is better than active income. NOT NECESSARILY.
Losses: When you are an owner in a pass through entity (partnership, S Corp), you need to be careful with how you categorize your participation in the business because if the company is generating losses, you may not get to take them.
Passive Activity Losses (PALs): When a taxpayer has a loss from a passive activity, it can only offset passive income, NOT active income.
Example of passive investor and passive activity loss limitations:
Pete is an individual taxpayer who owns a 25% interest in an LLC. He is categorized as a limited partner and his 25% ownership interest is just an investment as he does not participate in the day-to-day managerial decisions of the business. This means that Pete is a passive partner. The LLC generated a $100,000 loss, $25,000 allocated to Pete on his Schedule K-1. Pete has a full time job where he makes a salary of $100,000.
It would appear that Pete can offset his $100,000 income from his W-2 with his $25,000 loss from his Schedule K-1, however, because the loss is passive and the income is active, Pete cannot deduct the $25,000 loss until he has passive income. Therefore, the loss rolls forward until the LLC generates income in a future year, or Pete has passive income from another income stream.
How do you qualify as material participation?
You participated in the activity for more than 500 hours.
Your participation was substantially all the participation in the activity of all individuals for the tax year, including the participation of individuals who didn’t own any interest in the activity.
You participated in the activity for more than 100 hours during the tax year, and you participated at least as much as any other individual (including individuals who didn’t own any interest in the activity) for the year.
The activity is a significant participation activity, and you participated in all significant participation activities for more than 500 hours. A significant participation activity is any trade or business activity in which you participated for more than 100 hours during the year and in which you didn’t materially participate under any of the material participation tests, other than this test. See Significant Participation Passive Activities under Recharacterization of Passive Income, later.
You materially participated in the activity for any 5 (whether or not consecutive) of the 10 immediately preceding tax years.
The activity is a personal service activity in which you materially participated for any 3 (whether or not consecutive) preceding tax years. An activity is a personal service activity if it involves the performance of personal services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, or any other trade or business in which capital isn’t a material income-producing factor.
Based on all the facts and circumstances, you participated in the activity on a regular, continuous, and substantial basis during the year.
Rental Activities
Rental activities are always passive unless you are a “Real Estate Professional.” There is a special $25,000 allowance for a taxpayer who actively participates in a passive rental real estate activity. So you can deduct up to $25,000 of passive loss against active income if you are deemed to have “actively participated” in the rental real estate activity.
Active participation- not the same as material participation. Active participation is a less stringent standard than material participation. Examples of active participation (management decisions, approving new tenants, deciding on rental terms, approving expenses, etc.).
**So basically any taxpayer can easily qualify as active participation as long as they are making high level decisions for the rental.
Real Estate Professional Status
You qualified as a real estate professional for the year if you met both of the following requirements.
More than half of the personal services you performed in all trades or businesses during the tax year were performed in real property trades or businesses in which you materially participated.
You performed more than 750 hours of services during the tax year in real property trades or businesses in which you materially participated.
Disclaimer: The information provided above is not meant to be legal or tax advise. You should consult your CPA and attorney to determine the best course of action for your situation.
Mitzi E. Sullivan, CPA is a cloud based professional services provider specializing in cloud accounting.
If you sold capital assets in 2022 and generated taxable capital gains, it’s a great time to consider harvesting your capital losses to reduce or eliminate the capital gains tax. Below are a few strategies to consider.
If you sold capital assets in 2022 and generated taxable capital gains, it’s a great time to consider harvesting your capital losses to reduce or eliminate the capital gains tax. Below are a few strategies to consider.
Sell and Buy Back Stocks or Crypto
For your long-term hold stocks or cryptos that have built-in losses, consider selling before year-end and buying back the same asset later. To avoid wash sales, wait at least 31 days to repurchase stocks. Wash sale rules do not apply to cryptos.
If you are expecting lower Q3 & Q4 earnings reports, you may be able to repurchase the same asset at a lower price. This allows you to offset your capital gains, while maintaining your current positions.
You may want to maximize tax-rate arbitrage by exchanging short-term capital gains for long-term capital gains (LTGC).
Sell and Buy Similar
For stocks that have built-in losses, consider selling stocks before year-end and buying back similar stocks the same day. This allows you to offset your capital gains while maintaining your current portfolio balance.
The stocks cannot be substantially identical, or the wash sale rules will disallow the loss. This includes puts and calls.
However, you can purchase stock with a performance that is highly correlated with the stock you sold.
Sell and Buy Alternatives
For assets that have built-in losses, consider selling before year-end and buying alternative assets. This allows you to offset your capital gains and rebalance or reposition your portfolio.
For example, you may want to sell growth stocks with built-in losses and purchase value stocks or real estate. Or, you may have a taxable gain on the sale of your personal residence or business that can be offset with loss harvesting.
This may be a great way to clean up legacy assets.
Sell and Deduct Losses
If you don’t have gains to offset with losses, it may still be advisable to harvest losses. You can deduct up to $3,000 per year against ordinary income and carry unused amounts forward to offset future gains.
This allows you to save up losses and better time future gains.
Points to Ponder
Remember, the long-term capital gains tax rate starts at 0%. It most likely will not be beneficial to harvest losses in a year that you have qualified for a 0% LTCG tax rate.
You may want to recognize built-in gains to maximize your 0% LTCG tax rate for the year.
Loss harvesting is for taxable accounts only. It should not be used in retirement accounts.
Wash sale rules apply to purchases by your spouse or the company you control.
Consider the timing of dividend payments before selling.
Always consult your financial team. Everyone’s situation is different. Benefits depend on the investor’s tax rate when they deduct the initial loss, as well as the rate at which they realize the later gain that the initial loss created.
Disclaimer: The information provided above is not meant to be legal or tax advise. You should consult your CPA and attorney to determine the best course of action for your situation.
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