Blog - Frotton CPA
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Identity theft victims being scammed by emails and web sites posing to be the IRS is increasing at an alarming rate.  Many victims fall into the trap of answering emails which they think is from the IRS releasing confidential information such as social security numbers and other personal information.  These scammers sometimes file a fraudulent return under the victims name and have a refund sent the imposter.  The taxpayer becomes aware of this when they try to e-file their legitimate tax return and is rejected by the IRS. To avoid this trap, do not reply to an email that poses as the IRS.  The IRS never sends emails out to taxpayers regarding refunds, audits or requests for information.  The IRS has set up an identity theft hotline at 800-9018-4490...

The taxpayer operated a sole proprietor vending machine business, in which he deducted compensation paid to his two children. The IRS disallowed the education for amounts paid to his children after determining that the amounts were not ordinary and necessary expenses paid or incurred in a trade or business. The IRS also determined that the taxpayer was liable for the accuracy-related penalty in regard to the underpayment attributable to the disallowed deductions. The tax court ruled for the IRS on both issues. The taxpayer testified that the services provided by his children, ages ten and five, included: riding along on a weekly route, putting candy bars into the machines, sorting the totes full of candy, and breaking down the cardboard and sorting recyclable products. He testified that the children worked about ten hours per week, but he did not know for sure how often his children worked every week and he did not keep any record of their hours. For these services, he wrote checks to each child for $4,200 each year at the end of December and deducted these amounts as labor expenses. These checks were not cashed until at least two months later because the business had insufficient funds. Even after the checks were endorsed, the taxpayer retained control of the proceeds. He did not set up separate accounts for his children to deposit their alleged wages. Instead he kept the proceeds and either reinvested into the business or deposited the amounts into his own personal account. The taxpayer never established an hourly rate for the children's services and paid a set amount for both years in question. The taxpayer testified that the payments to his children were based on what he believed the "law allowed for, so that they would not have to file taxes." The taxpayer did not keep adequate books and records or otherwise substantiate the deductions reported on his Schedule C and the amount allegedly paid to the...

The IRS requires a single member LLC that has employees to have two Federal ID numbers(EIN). One EIN is assigned to the individual owner (as a sole proprietor) and one is assigned to the LLC. You cannot use the online application to apply for these two EIN numbers. To apply, call the IRS Business and Specialty Tax line at 800-829-4933 and an IRS representative will take the information from you and assign you the required two EIN's. For payroll purposes only the EIN assigned to the LLC is used. The EIN assigned to the sole proprietorship is used only in preparing your personal income tax form. The IRS links, internally, both of these numbers together. When the State requests an EIN number, in registering, submit the LLC EIN....

Small Business Payroll Processing Options   Let’s face it there are other options besides using Digit Payroll Corp to get your payroll processed.  Yes, we would love your business, but most of all, we want you to choose the right one for you.   When it comes to managing payroll, there are really two basic options - in-house or outsource - with joining a PEO (professional employer organization) as a third "possible" option. Let's review each of these three options in detail using real life examples.   OPTION 1 - in-house payroll: Processing your own payroll in-house may, at first glance, seem like a cheaper option to outsourcing.  Monthly in-house software fees vary from a low of $17 per month to $99 per month plus $2 per employee.  So if you have six employees, at most you would pay $1332 per year for the software.   But watch for the software hidden costs - software companies usually make you buy their upgraded accounting software at least every two years to continue using their payroll module.  This increases your software fees by $100 to $500 per year.   This is just the software fees.  You still need to pay an employee to process the payroll.  Further  you  need to pay your accountant $75 to $200 an hour to prepare the tax payments and payroll tax returns.   Let's recap:   Software fees Mandated Accounting software upgrades Processing wages Accountant fees   CASE STUDY:   Digit Payroll recently welcomed a new client who had been using a popular in-house software.    They only had 4 employees and paid them every other week (bi-weekly).  Their software contract was up for renewal, and the supplier wanted $300 extra to keep their accounting (payroll software) up to date.   The client’s accountant would log in to their records every two weeks and pay their payroll taxes for them. Every quarter the accountant would file their payroll tax returns for the client.  It worked smoothly enough. When the client added up all the payroll processing costs, they found they...

Around the end of July of every year the State of New Jersey issues a bill to all employers for an “Annual Assessment”.  This is a mandatory tax which is not part of your normal payroll tax. It is a similar envelope in which New Jersey sends delinquency notices, therefore it is easy to be confused with a penalty notice.  An example of the notice can be found at NJ Annual Assessment . Please write a check to “State of New Jersey” for the amount due on this notice.  In the check memo write in “Annual Assessment” and your EIN number as noted on top right hand corner of this notice.  Send in the envelope provided by the State. New Jersey does charge penalties and interest for late/nonpayment of this assessment.  The penalties are charged by the Department of Labor. Any questions regarding this assessment should be directed to the NJ Assessment Office at 609-292-7397 or email assessments@dol.state.nj.us...

The IRS will start random audits of payroll tax returns starting in February of 2010.  They are estimating 6,000 employers will be audited over the next three years.  The IRS will be examining issues such as worker classification violations (employee vs. subcontractor) as well as fringe benefits.  The IRS will use these results to select other businesses in the future to target in on business or industries that have exposure in these areas....

Healthcare savings account (HSA) is a medical savings account that can be used on a tax-advantaged basis. To be eligible for an HSA a participant must be covered by a high deductible health plan. HSA accounts belong to the employees and they can take the accounts with them if they leave their employer. HSA accounts can be funded by either the employer or employee or both. Federal Tax Issues: All qualified contributions into an HSA are tax-free. Employer contributions are not part of the employee's income. Employee contributions can be deducted off the employee's individual tax return. Any distribution from an HSA for qualified medical expenses is tax free. HSAs are managed similar to IRA's. There are a variety of investment options that the participant can invest their money. Participants can make withdrawals from HSAs after the age of 65 for non-medical purposes but the withdrawals are taxed as ordinary income (similar to an IRA). If distributions for non-medical purposes are made before age 65 there is a 10% tax penalty. New Jersey Tax Issues: New Jersey does not presently recognize HSAs as tax favored vehicles presently (although there is pending legislation that may change this). All is not lost though, if the participant handles it correctly. HSAs follow similar rules for NJ as Sect 125 plan, pretax medical benefits. Employer contributions to HSAs are included in NJ income and employee contributions are not deductible on the NJ individual tax return. But withdrawals from HSAs for medical purposes are deductible on the NJ tax return (subject to a 2% exclusion) as medical expenses. Please consult your tax advisor. What Does This Mean for Payroll Reporting? Employer contributions to an HSA should be reported, by the end of the year, to Digit Payroll. Federal taxable wages will not be affected, although New Jersey state taxable wages will increase by this amount. Employee contributions need not be reported. For more information go to the U.S. Dept. of Treasury web site....

Amounts paid for health insurance for more than 2% shareholder of an S Corporation should be reported to Digit Payroll by the end of the year. These amounts should be included in the shareholder's Form W-2 . This amount is included as income for federal income tax purposes but may be excluded from Social Security, Medicare and FUTA taxes. Make sure the shareholder alerts his/her tax preparer of this inclusion, since a deduction for health insurance premiums may be made on page one of the shareholder's individual income tax return....

The New Jersey Senate approved a bill that grants six weeks of leave at reduced pay to workers who stay at home to care for a new child or sick relative. According to the Paid Family Leave Act (A873) workers can collect up to two-thirds of their pay to a maximum of $524 a week. For a new child, the leave must be taken within 12 months of the child's birth or adoption, and the worker must give 30 days' notice prior to taking leave. To care for an immediate family member (which means a child, parent or spouse -- no second cousins, grandmothers or great-uncles), the employee must give 15 days' notice. Employers can require workers to use up to two weeks of available vacation time, sick time or personal days before they are eligible for paid family leave. Companies with over 50 employees need to hold the job for the employee, under 50 workers there is no such requirement. There will be a new withholding payroll tax, similar to the disability payroll tax, effective January 1, 2009. The tax rate will be .09 percent on the first $27,700 of wages and increase to .12 percent the next year. And if it follows a similar trend as the disability tax, it will go up every year after that....

Putting family members on payroll may seem like a good idea for many small businesses.  In fact, in some circumstances, family members cost the company less in payroll taxes than a non-family member.  Although, like many payroll tax rules, the regulations are tricky. Child employed by parents.  A child under the age of 18 who works for his or her parents, and the business is either a sole proprietorship or partnership (both parents most be the only partners), is not subject to social security, Medicare and FUTA taxes.  In New Jersey the child, under a sole proprietorship only, is not subject to NJ state unemployment or disability taxes either.  The child is subject to federal income tax.  The exemption for FUTA tax only is up to age 21.  This rule does not apply to corporations even if the only owners are the child’s parents. Caution:  Children are still governed by the NJ Dept of Labor Laws which restricts children’s employment ages (over 14) and types of employment. One spouse employed by another.  An individual who works for his or her spouse, and the business is a sole proprietorship, the individual is subject to social security and Medicare tax but not FUTA tax.  In New Jersey the individual, under a sole proprietorship only, is not subject to NJ state unemployment or disability taxes either.  The individual is subject to federal income tax.  Again, this rule does not apply to corporations. Parent employed by child.  A parent who works for his or her child, and the business is a sole proprietorship, the parent is subject to social security and Medicare tax but not FUTA tax.  In New Jersey, the parent is not subject to NJ state unemployment or disability taxes either. The parent is subject to federal income tax.  Again, this rule does not apply to corporations....