Category: Filing

How To E-File 1099 Forms For Free

If you’re a business owner who’s hired independent contractors for services rendered to your business, you can e-file 1099 forms for free. Through the IRS’s Information Returns Intake System (IRIS), you can file 1099 returns, as well as print recipient copies.

1099 Requirements

If you paid an independent contractor over $600 in a tax year, you’re required to file a 1099-NEC Form with the IRS and issue the independent contractor a copy by January 31st.

As of 2023, if you must file 10 or more 1099 forms in a given tax year, you’re required to e-file them.

IRIS Taxpayer Portal

In order to use the IRIS portal you’ll have to submit an application to receive a Transmitter Control Code. This code will allow you access to the portal.

The application will require your business information and the information of the person submitting the application (also called a Responsible Office). The business must have an EIN, as social security numbers or ITINs are not acceptable.

How to Get an EIN

To get an EIN you’ll have to submit an application, providing your business information and the information of the Responsible Party. The Responsible Party is the person who exercises control over the business, like the owner. Most EINs are issued immediately.

More detailed information is provided in Publication 5717, Information Returns Intake Systems.

The #1 Reason To Open An IRS Tax Account

Benefits of a tax account

Signing up for an IRS tax account has multiple benefits. You can apply for an installment payment plan, request tax transcripts, sign powers of attorneys. Most importantly, you can view your tax activity. Why is this important?

Cases have increased in which taxpayers try to e-file their tax returns, only to have them be rejected because a return under that social security number has already been filed. This problem is more likely to go unnoticed by taxpayers who do not file every year, like senior citizens. If you have a tax account, and you check it routinely, you can catch a problem before it snowballs.

It’s also not unheard of to have tax professionals change information on a client’s return after the client has left the office. If this were to happen, you can check the tax return on file against the tax return copy you were given.

Signing up for a tax account

To open a tax account with the IRS:

>Click on “Get your tax record”.

 >Under, “Access Tax Records in Online Account”, click on “Visit or create your Online Account”.

  >Click on “Sign in to your Online Account”

   >Next, you’ll be prompted to sign in with your ID.me login.

If you don’t already have an ID.me account you’ll have to create one. ID.me verifies taxpayers’ identities by having them upload  selfies and pictures of their IDs. Once you create an ID.me account you’ll be able to access your tax account.

As identity theft crimes keep rising, it’s important for us to remain vigilant as best as we can, not just of our own finances, but of our loved ones as well. This is just another one more way to do so.

Documents You Need If Your Earned Income Credit Is Audited

If you’re claiming the Earned Income Credit based on a qualifying child, expect more rules than if you were claiming it only for yourself. The IRS claims “an estimated 33% of the credit is paid out in error.”

There are 4 tests your qualifying child must meet before you can claim the credit. If audited each test must be supported by documentation.

1. The relationship test

Your qualifying child must be your son, daughter, stepchild, foster child, or a descendant of these. Your sibling, half sibling, stepsibling, or a descendant of these can also be a qualifying child.

2. The age test

The qualifying child must be under the age of 19 at the end of the tax year and be younger than you. Students under the age of 24 also qualify.

3. The residency test

The qualifying child must have lived with you over half of the year.

4. Joint return test

Your qualifying child cannot file a joint return unless it is only to claim a refund on income tax withheld.

Nothing is more frustrating than a taxpayer who is entitled to the credit but due to personal circumstances isn’t prepared to provide supporting documents when audited. It’s important to know what’s expected to better prepare.

The IRS generally looks for evidence that prove 3 of the 4 tests above are true. It wants you to prove that the child is related to you, lived with you, and is under the qualifying age.

To prove the child lived with you, you’ll need documents that tie both you and the child to the same address. There are situations in which one parent claims the child even though the child lives with the other parent. Typically, the child has the same address as the parent he lives with, posing a challenge to the parent wanting to claim the child.

Proving a qualifying relationship to the child usually means submitting birth certificates. If your qualifying child is your son or daughter this should be an easy task. If you’re a grandparent claiming your grandchild, however, you’ll have extra steps to follow. You’ll not only need the child’s birth certificate but also the child’s parent’s birth certificate to prove their relationship to you.

If the child is under the age of 19 you generally don’t need to submit anything. If the child is under the age of 24, you’ll need to submit proof that the child was a full-time student for any part of five months of the year.

An EIC audit can be a small deal to some, and a big deal to others. The best course of action is to know what’s expected and have everything ready, just in case. In the event that you can’t provide supporting documents the IRS might deny or reduce your EIC for future tax years. For more information consult Publication 596.

What To Do with the 1099-K You Get from Venmo

If you’re one of the many people who use payment apps like Venmo and Zelle, you’ve probably heard that companies will begin reporting amounts to the IRS. There’s a lot of confusion about the new change but this article should clear most it.

Companies that use third-party payment networks have always been required to report amounts received to the IRS. The former threshold was $20,000 but the IRS brought it down to $600 in recent years. (Check out this article for more information.)

The IRS is focused on making compliant individuals and companies who fail to report income earned from business activity. Although the IRS has clarified what constitutes taxable and non-taxable, that still won’t make it easy on individuals who use payment apps for personal use and still receive Form 1099-K.

So here it goes. Amounts received through payment apps that were personal (such as gifts and reimbursements) will either have to be corrected by the company issuing the form or will have to be adjusted on your tax return.

The IRS advises taxpayers to call the issuing company (their info should be on the 1099-K) and have them correct the amount reported. If, for whatever reason, that can’t be done, you can make the correction on your tax return.

Note: Keep your original 1099-K and all copies of your communication efforts with the issuing company.

To make the correction on your tax return you’ll have to report the amount received on Schedule 1, line 8z. Then, report the same amount on the same schedule, on line 24z. This will fulfill the reporting requirement while also zeroing out the income.

Hopefully this article clarified the biggest confusion about Form 1099-K. If you have other questions the IRS has set up an FAQ page to answer questions about this form.

Paying Less in Taxes when Selling Your Home

Taxpayers are generally allowed to exclude up to $250,000 ($500,000 if Married Filing Jointly) from gains of a home sale. There are eligibility requirements that must be met to qualify, found in IRS Publication 523. For most, those requirements boil down to whether the home was owned and used by the taxpayer for 2 out of the previous 5 years before the sale of the home. The 2 years don’t have to be continuous. You also must not have taken an exclusion for the sale of another home in the 2 years prior to selling your current home.

The exclusion alone might not be enough to exclude all gains. In order to bring those gains within the exclusion range it’s important to increase the basis of the home. Basis is your investment in the property. It includes your purchase cost and certain closing costs and improvements made before selling.

The following closing costs are allowed to be included in the basis:

  • Abstract fees (abstract of title fees)
  • Charges for installing utility services
  • Legal fees (including fees for the title search and preparing the sales contract and deed)
  • Recording fees
  • Survey fees
  • Transfer or stamp taxes
  • Owner’s title insurance

Qualifying improvement include:

Additions
Bedroom
Bathroom
Deck
Garage
Porch
Patio


Lawn & Grounds
Landscaping
Driveway
Walkway
Fence
Retaining wall
Swimming pool

Systems
Heating system
Central air conditioning
Furnace
Air/water filtration systems
Wiring
Security system
Lawn sprinkler system

Exterior
Storm windows/doors
New roof
New siding


Insulation
Attic
Walls
Floors
Pipes and duct work

Plumbing
Septic system
Water heater
Soft water system
Filtration system


Interior
Built-in appliances
Flooring
Wall-to-wall carpeting
Fireplace

Your gain is calculated by subtracting your basis from your selling price.

It’s important to keep track of these adjustments. They might make all the difference when it comes time to report your sale.

Tax Filing for Spouses Who Run a Business Together

It’s important, when spouses work together, that each spouse gets the social security and Medicare credit they deserve. It’s common for one spouse to file a Schedule C, claiming all income and expenses, when in fact, both spouses contributed equally to running their business.

The IRS generally requires married couples who run unincorporated businesses to file as partnerships. To limit the level of complexity, however, the IRS allows for the Qualified Joint Venture exception. This exception is available to married couples who:

1) file a joint return and are the only members of the venture.

2) materially participate in the business.

3) elect not to be treated as a partnership.

If you and your spouse qualify to file as a Qualified Joint Venture, you can each file a Schedule C. You’ll need to split the income and expenses according to each person’s interest in the business. For example, if both spouses were equally responsible and exerted the same level of control in the business it’s safe for each spouse to report 50% of the income and expenses on their respective Schedule Cs. You won’t necessarily pay more in taxes, but you will make sure each person’s social security and Medicare accounts are credited.

Note that the business must be co-owned by both spouses and must not be a state law entity. If you’ve registered the business with the state as an LLC, you no longer qualify as a Qualified Joint Venture and must file as a partnership. This involves filing Form 1065, in addition to Form 1040.

Tax Treatment of LLCs

One of the biggest misconceptions of individuals who register their businesses as LLCs with the state is that they’ll now be able to “pay themselves” from their business earnings.

It’s necessary to clarify how LLCs actually work, so that individuals can make the right decisions for themselves and their businesses.

An LLC is a legal entity bound by the laws of the state it was registered in. An LLC is not by default a corporation for tax purposes. If you are the sole owner and member of your LLC you’re considered a disregarded entity by the IRS. This means that for income tax purposes you’re still considered a sole proprietor, and will still have to file a Schedule C. The only time you’re considered a corporation is when you hire employees, in which case you’ll need to apply for an EIN in order to file employer tax returns such as Form 941.

You are not obligated to remain a disregarded entity, however. The IRS offers business owners the option to become either a C corporation or an S corporation (each with their own specific tax rules and consequences).

In short, an LLC does not offer by default favorable tax treatment to sole proprietors, unless they change their classification to a C corporation or S corporation. LLCs do offer business owners some legal protection to their assets and might still be a good business option. It’s important to discuss this topic with both a lawyer and a tax professional if you’re thinking of going this route.

For more information check out IRS Publication 3402, Taxation of Limited Liability Companies.

Filing a Deceased Parent’s Tax Return

If you’re the personal representative of a parent who has passed away, you’ll be tasked with filing their final tax return.

The first step is to gather all their tax documents. These include documents showing income and those supporting tax deductions. It’s important to know what year your parent’s final tax return is actually due. For example, if your parent passed away November 2022, their final tax return is due April 2023. If, however, your parent passed away March 2023, and did not file for 2022, you’ll need to file tax returns for both 2022 and 2023.

If your parent’s tax return shows a tax due, you’ll be responsible for paying it. If it shows a refund, you’ll need to attach Form 1310, Statement of Person Claiming Refund Due a Deceased Taxpayer. The IRS doesn’t require a death certificate, but advices you have one for your records.

When filing the tax return, you must write at the top of the return, “DECEASED”, followed by the person’s name and date of death. If filing electronically, the software should offer a line for this information in the personal data section. The representative’s name and address go in the address section. To sign the return, write “personal representative” on the line.  

The above applies to all tax returns needing to be filed by representatives. Some returns, however, are more complicated than others, and might require extensive professional help. Consult a tax professional if your parent had sources of income beyond jobs and/or pensions.

Getting Paid in Virtual Currency

If you’re self-employed and are considering virtual currency as a payment method, you’ll be surprised to find that not much will change for you in terms of tax reporting. That being said, there’s still a few details to go over.

First, the IRS classifies virtual currency (or digital assets) as property, not cash. Virtual currency falls in line with other property like stock. So, when you provide a service and get paid with virtual currency, you’re exchanging a service for a property.

As an independent contractor, you’re still obligated to report income over $400 on your Schedule C and to pay self-employment tax on that income. The individual or company that paid you still has to report payments made to you over $600 to the IRS. In this regard nothing has changed.

The only thing that has changed is how you calculate the income you receive. In a regular cash transaction, let’s say you charge $100 for your service, the buyer pays you and you report those $100 straight on your return. If you receive virtual currency, you’ll have to report the Fair Market Value (in US dollars) of that payment. The FMV is what the currency was going for on the market on the day you received it. This makes it important to keep detailed track of your virtual receipts.

It’s possible you might not receive any tax form showing your income in virtual currency. You’ll still have to report it. For a few years now the IRS has added a question at the top of the 1040 asking if you’ve received or sold digital assets. If you got paid in virtual currency, click “Yes”. Although slowly, the IRS is cracking down on taxpayers who might owe taxes because of virtual currency transactions.

Tax Rules for Students Working

Scenario: An 18-year-old college student, who is claimed as a dependent on his parents’ tax return, decides to get a job. He wants to know how this will affect his parents’ return. 

There are three main concerns when a student takes up a job while being claimed on his parents’ tax return.

#1. Can my parents still claim me?

Your parents can still claim you even if you get a job, so long as you’re still under the age of 24 at the end of the year, remain a student, and you don’t provide over half of your support. Technically, you’re supposed to live with your parents, unless the only reason you’re not is because you’re going to school.

#2. Do you have to file a tax return?

Maybe. As a dependent, there are certain filing requirements you must meet to be required to file.

If your income comes solely from a W2 job and you haven’t married, you must have made over $12,550 (for the 2022 tax year). If you made less than this, you might still want to file if a refund is in order. Which leads us to our third concern.

#3. If I file, will I owe?

How much you’ll get back or owe boils down to your standard deduction. As a dependent, your standard deduction is the larger of $1,100 or the income you earned plus $350 (but not more than $12,550).

For example, you got a summer job and made $5,600. Your standard deduction is the larger of $1,100 or $5,600 plus $350. Your standard deduction is $5,950. On a straight-forward return like this, taxable income is 0 and there’s very likely a refund.

Note: It’s important for you and your parents to be on the same page. The best course of action is to consult a tax professional before getting a job to have a higher degree of certainty of what to expect come tax time.