The Correct "Process" for Correcting an employment Tax Return

Mike Habib, EA

Even the best of us can make a mistake on a quarterly Form 941 (or on a Form W-2, which often creates an error on the 941). The IRS has introduced a new form for correcting the dollar amounts on a previously filed 941: Form 941-X, Adjusted Employer's Quarterly Federal Tax Return or Claim for Refund.

The American Payroll Association offers the following guidance in your first step on the form: choosing the correct process. Remember, the 941-X is a stand-alone amendment to a Form 941 from a previous quarter. Near the top of the form, you'll indicate which quarter and year you are correcting.

For each correctable line on the 941, there is a corresponding line on Form 941-X. You'll indicate the corrected amount (i.e., what you would have reported had the error not occurred), the originally reported amount, and the difference. There are also "X" forms for each of Forms 943, 944, 945, and CT-1.

Adjusted return or "Claim", after filling in your identifying information, you are asked to select your process. "Adjusted employment tax return:"

If you owe money to IRS, you will make a payment as you file Form 941-X.

If the IRS owes you money, you'll include the amount in the "Total deposits" (line 11) on your current quarter's 941. However, you won't have to attach the 941-X to that 941.

"Claim:" If the IRS owes you money, it will issue a refund of the amount it owes you. Or, if IRS had sent you a balance due notice for that same quarter, it will apply the amount against that balance.

Crucial timing for an "adjusted return", If the IRS owes you money and you want to use the adjusted return process (applying the amount as a deposit on a Form 941), IRS advises you to file the 941-X in the first two months of a quarter. This will give IRS enough time to process the 941-X and post the credit before you file the 941. For example, if in December 2009 you discover IRS owes you money, and you want to use the adjusted return process, you should wait until January 2010 to file Form 941-X and record the credit as a "deposit" on the 941 for the first quarter of 2010.

Corrections in both directions for one quarter, If, for one quarter, you owe money to IRS (e.g., income tax withholding), and IRS owes you money (e.g., social security tax), it's a little more complicated.

> Use the adjusted return process if the net of the corrections is that you owe IRS, or if the net result is that IRS owes you and you want to apply the credit to your next 941. (Interestingly, you cannot "claim" a refund, even if the net result is that IRS owes you.)

> Or, file two separate Forms 941-X. Use the adjust-ed return process for the amount you owe IRS (and make a payment). Use the claim process for the amount IRS owes you (and IRS will send a refund). Be sure to also see the new expanded instructions for this form, which include lots of examples.

Interest expense deduction of foreign corporations

Mike Habib, EA

TD-9465, provides final regulations under section 882(c) of the Internal Revenue Code (Code) concerning the determination of the interest expense deduction of foreign corporations engaged in a trade or business within the United States. These final regulations conform the interest expense rules to recent U.S. Income Tax Treaty agreements and adopt other changes to improve compliance.

REG - 108045-08 and TD-9466 provide guidance regarding the definition of ommission of gross income.

REG-155929-06 contains proposed regulations regarding the requirements to qualify as a Type III supporting organization that is operated in connection with one or more supported organizations. The regulations reflect changes to the law made by the Pension Protection Act of 2006. The regulations will affect Type III supporting organizations and their supported organizations.

Announcement 2009-69 includes changes to Revenue Procedure 2007-65. Specifically, the announcement expands the rights of developers and owners to enter into agreements for the purchase of the wind energy property owned by the partnership to permit a purchase price determined prior to exercise if the parties reasonably believe that the price will not be less than the fair market value of the energy property at the time the right may be exercised, clarifies how section 469 applies to credits generated by wind energy facilities, clarifies that the revenue procedure only provides safe harbor requirements and makes conforming changes to the revenue procedure to reflect these three changes.

Notice 2009-81 explains the circumstances under which the 4-year replacement period under section 1033(e)(2) is extended for livestock sold on account of drought. The Appendix to this notice contains a list of counties that experienced exceptional, extreme, or severe drought conditions during the 12-month period ending August 31, 2009. Taxpayers may use this list to determine if an extension is available.

We represent foreign corporation with US tax matters before the IRS. Contact us today for a free evaluation and analysis.

IRS Issues Guidance on 2009 Required Minimum Distribution Waiver

Mike Habib, EA

The Internal Revenue Service today provided guidance for retirement plan administrators, plan participants and retirees regarding recent legislation affecting required minimum distributions. The Worker, Retiree, and Employer Recovery Act of 2008 waives required minimum distributions for 2009 from certain retirement plans.

Generally, a required minimum distribution is the smallest annual amount that must be withdrawn from an IRA or an employer's plan beginning with the year the account owner reaches age 70½. The 2008 law waives required minimum distributions for 2009 for IRAs and defined contribution plans (such as 401(k)s) and allows certain amounts distributed as 2009 required minimum distributions to be rolled over into an IRA or another retirement plan.

Notice 2009-82 provides relief for people who have already received a 2009 required minimum distribution this year. Individuals generally have until the later of Nov. 30, 2009, or 60 days after the date the distribution was received, to roll over the distribution.

The notice also provides guidance for retirement plan sponsors. It contains two sample plan amendments that plan sponsors may adopt or use to amend their plans to either stop or continue 2009 required minimum distributions. Both sample amendments provide that participants and beneficiaries can choose to receive or not to receive 2009 required minimum distributions. Also, both sample amendments allow the employer to offer direct rollover options of certain 2009 required minimum distributions.

Plan sponsors may need to tailor the sample amendment to their plan's particular terms and administration procedures and must adopt the amendment no later than the last day of the first plan year beginning on or after Jan. 1, 2011 (Jan. 1, 2012 for governmental plans).

Cash IS Taxable

Law school grad turned call girl Cristina Warthen under house arrest after cheating the Government

Source: NY Daily News

Law school comes in handy when trying to evade taxes as a call girl, or at least that's what one Stanford graduate seemed to think.

Cristina Warthen - a 2001 Stanford Law School graduate - was sentenced Monday on a federal tax conviction related to her upscale call-girl business, according to a report from Mercury News.

Warthen pleaded guilty for failing to pay taxes on nearly $133,000 earned in '03 during her high-end prostitution days as a touring escort named Brazil. She serviced clients throughout the nation in various cities, including New York, Chicago and Washington.

The jet-setting Warthen, previously Christina Shultz, sold herself on a racy Web site called TouchofBrazil.net in hopes to pay for law school.

In a plea deal with the government, Warthen has been fitted with an electronic monitoring device while sentenced to one year of home detention, as well as three years' probation.

Warthen is also responsible for paying $243,000 to the government, a mercy offer by prosecutors after Warthen demonstrated she could not afford the original amount of $313,000. Her recent divorce from David Warthen - co-founder of online search engine Ask.com - has left her broke and unemployed.

The once-wealthy Web entrepreneur lost his fortune and his wife after the stock market collapsed. According to the report, he filed for divorce this year citing "irreconcilable differences."

In a San Jose, Calif., federal court, U.S. District Judge James Ware forced restrictions on Warthen's escort advertisements while on probation.

According to Mercury News, the restriction on advertisements occurred once Assistant U.S. Attorney David Callaway told Ware that the former escort had posted Internet ads claiming "companionship" for $2,000 a night.

"We all know that's a wink and nod, and what she really is advertising is high-end prostitution," Callaway told the court, Mercury News reports.

Warthen has since been living temporarily in Seattle with her mother, and continues to advertise on the Web with more ambiguity surrounding her services.

Brian Getz - Warthen's attorney - claims the government has no grounds to restrict his client's free speech right to advertise, as long as she's not breaking prostitution laws. Ware was unmoved by the plaintiff's argument.

"It pains me ... that you are asking the court for permission to engage in advertising an escort business," Ware told Warthen, in the Mercury News report.

Tax Relief Services for Union Members

We represent Union members before the IRS and their respective States in regards to tax matters such as back taxes, tax problem resolution, stopping wage garnishments, tax relief services, and IRS tax audits.

If you are a Union member of any of the following organizations and currently experiencing a tax problem, you will get a special discount on our trusted Union member all-inclusive tax relief services.

» AFGE - American Federation Of Government Employees

» AFL-CIO - AFL-CIO

» AFM - American Federation of Musicians

» AFSCME - American Federation of State, County, and Municipal Employees

» AFT - American Federation of Teachers

» AFTRA - American Federation of Television and Radio Artists

» APWU - American Postal Workers Union

» ATU - Amalgamated Transit Union

» BAC - International Union of Bricklayers and Allied Craft Workers

» BCTGM - Bakery Confectionery Tobacco and Grain Millers International Union

» BLE - Brotherhood of Locomotive Engineers

» BMWE - Brotherhood of Maintenance of Way Employees

» CWA - Communication Workers of America

» GCIU - Graphics Communication International Union

» IAFF - International Association of Fire Fighters

» IATSE - International Alliance of Theatrical Stage Employees

» IBB - International Brotherhood of Boilermakers

» IBEW - International Brotherhood of Electrical Workers

» IBT - International Brotherhood of Teamsters

» ILA - International Longshoremen's Association

» ILWU - International Longshore and Warehouse Union

» IUEC - International Union of Elevator Constructors

» IUOE - International Union of Operating Engineers

» IUPAT - International Union of Painters and Allied Trades

» IW - Iron Workers

» IWW - Industrial Workers of the World

» LIUNA - Laborers International Union of North America

» NALC - National Association of Letter Carriers

» NEA - National Education Association

» NPMHU - National Postal Mail Handlers Union

» NWU - National Writers Union

» OPCMIA - Operative Plasterers' and Cement Masons' International Association

» OPEIU - Office and Professional Employees International Union

» SAG - Screen Actors Guild

» SEIU - Service Employees International Union

» SIU - Seafarers International Union

» UA - United Association of Journeymen and Apprentices of the Plumbing and Pipefitting Industry

» UAW - United Auto Workers

» UE - United Electrical Radio and Machine Workers of America

» UFCW - United Food and Commercial Workers

» UFW - United Farm Workers

» UNITE HERE - Union of Needle trades, Industrial and Textile Employees and Hotel Employees and Restaurant Employees

» UPIU - United Paper Workers International Union

» USWA - United Steel Workers

» UTU - United Transportation Union

» UURWAW - United Union of Roofers, Waterproofers and Allied Workers

» UWUA - Utility Workers Union of America

If you have received an "Intent to Levy" letter or a "Notice of Levy" letter from the IRS then you cannot afford to wait any longer! Do something to resolve your tax debt. It makes far more sense, and will probably be less costly in the long run, to resolve your tax problem with the IRS now, rather than dealing with the potential embarrassment and financial burden of having your employer garnish and levy your wage paycheck or your bank levy and freeze your bank account after receiving an IRS levy order to withhold funds from your bank account or your paycheck.

Keywords: union, unions, tax relief, wage levy release, stop wage garnishments, irs tax audits, irs help, tax problems, irs tax liens, irs tax levies, tax preparation, tax representation, back taxes, trusted union members, union tax relief service provider

IRS to Audit 6,000 Companies to Test Employment Tax Compliance

Source: Bloomberg

By Ryan J. Donmoyer

Sept. 18 (Bloomberg) -- The Internal Revenue Service will audit 6,000 U.S. companies to determine whether they pay all their required employment taxes to fund Social Security and Medicare benefits.

The IRS said the audits will provide data for its first statistical analysis since 1984 of how often companies misclassify workers to duck tax obligations, fail to pay taxes on fringe benefits such as personal use of company cars, and improperly pay taxes for company executives. The audits will begin in February, and the companies will be randomly chosen.

"We think businesses have significantly changed over the last 25 years," John Tuzynski, chief of employment tax operations at the IRS, said in an interview today. "This will help us find out where there are real issues we have to address."

The Treasury Department in 2005 estimated, based on the 1984 IRS data, that companies underpay employer taxes by about $14 billion annually. In particular, federal agencies have raised concerns about whether employers are properly classifying workers as company employees or independent contractors.

Employee misclassification "could be a significant problem with adverse consequences" because it cheats the government out of tax revenue and employees out of labor protection, the Government Accountability Office said last month. Employees who are improperly classified as independent contractors can be denied health benefits, overtime pay, and unemployment insurance.

Tuzynski said the IRS audits, to be conducted over three years, also will focus on fringe benefits such as company cars and personal use of corporate-owned vacation property, as well as the way salaries are reported for officers at so-called S- corporations.

Face-to-Face

Most of the audits will be conducted face-to-face, Tuzynski said, although the IRS also will gather information from internal sources and the Internet.

"We're going to try to make it as least burdensome as we can," he said.

Employers are required to pay half of their workers' 12.4 percent Social Security tax and 2.9 percent Medicare tax when the workers are classified as "employees." Workers classified as "independent contractors" pay the entire levy themselves.

The Bureau of Labor Statistics reported that 10.3 million workers, or about 7.4 percent of the workforce, were classified as "independent contractors" in 2005. It's unknown how many of those weren't properly classified as independent contractors.

States uncovered about 150,000 workers in 2007 who weren't receiving labor protection because they were misclassified, the GAO said. Improper worker classification costs state governments revenue used to pay unemployment benefits.

FedEx Corp. said on Sept. 11 that the IRS, following an audit of the company's 2002 taxes, is proposing to assess tax and penalties of $14 million related to the misclassification of employees as independent contractors. The company said it would contest the IRS's findings.

To contact the reporter on this story: Ryan J. Donmoyer in Washington at rdonmoyer@bloomberg.net.

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About our Tax Relief firm:

Mike Habib is an IRS licensed Enrolled Agent who concentrates his tax practice on helping individuals and businesses solve their IRS tax problems. Mike has over 20 years experience in taxation and financial advisory to individuals, small businesses and fortune 500 companies.

IRS problems do not go away unless you take some action! Get IRS Tax Relief today by calling me at 1-877-78-TAXES. Also online at http://www.MyIRSTaxRelief.com

Thinking of hiring a $5000 tax attorney?

HOLD IT.

If you do not qualify for an IRS Offer in Compromise, an attorney CANNOT help you.

That's $5000 down the drain.

Many of the unnamed tax attorneys that advertise are nothing but fast-talking salesmen trying to get your money without really helping you solve your tax problem. They tend to offer the same thing - tax relief through an IRS Offer in Compromise - even if this may not be the best resolution in your particular case. Unfortunately, many taxpayers fall for the trap and pay these unnamed tax attorneys $5000 or much more only to find out that the unnamed attorney can do nothing to protect them from the harassment of the IRS aggressive collection efforts. They are still threatened with bank and wage levies, property seizure, etc. Worse, the IRS may already wipe out their wages and bank accounts and seize their properties.

Don't let this happen to you.

PROTECT YOURSELF

In order NOT to be scammed by these glorified salesmen, you must GET A SECOND OPINION.

You must treat your tax problems the way you would treat a sickness - by going to another doctor and getting a second opinion to verify if the first is accurate. It only makes sense to do this before you commit one year of your life and a huge percentage of your bank account to an Offer in Compromise without a guarantee of success.

WHOM CAN YOU TRUST?

My name is Mike Habib, and I am an Enrolled Agent - this means that I am federally licensed by the United States Treasury to represent taxpayers like you before the IRS. My office is located in Pasadena, California, and I have been successfully handling a busy tax relief practice helping clients with serious IRS issues in all 50 states.

I have seen so many people in your situation - desperate to get proper tax help, and confused about who they should turn to. This is why I have made it my PERSONAL ADVOCACY to reach out and make sure that you do not get ripped off by greedy "unnamed tax lawyers" who are only after one thing - your money.

Before coming to me, many of my clients were conned and overcharged by companies and unnamed lawyers trying to take advantage of their vulnerability. In some cases, the firm just took their money and left them hanging. In other cases, it turns out that they are not qualified for an Offer in Compromise in the first place, and they only found out a year later.

LET ME HELP YOU

These con artists are giving the tax problem resolution industry a bad name. They make honest tax problem solvers like us seem like predators. I am tired of it.

Let me show you how it's really done.

Let me solve your IRS tax problem so you can get real tax relief.

Call me this week and I'll waive my usual charges for the thorough analysis of the real options available to you. In essence, I am giving away my second opinion FOR FREE. You don't have to hire me - you may still choose to hire that unnamed tax lawyer, with no physical address or bio, you talked to if you want.

You will get my honest opinion regarding your chances of success in using an IRS Offer in Compromise, and also a discussion of your other alternatives to solving your tax problem, such as negotiated installment plans, penalty abatement, amended returns, and bankruptcy.

Call toll free (877) 78-TAXES, 877-788-2937, now and let an honest tax relief expert help you.

Back taxes shutters Jack in the Box Source: Mercury-Register A state tax dispute is behind the sudden Jack in the Box closures Thursday. A press release issued this morning indicated that owner Abe Alizadeh, president of Kobra Properties, has temporarily closed the restaurants. Alizadeh owns 70 Jacks in northern and central California, including ones in Chico, Paradise and Oroville. A statement issued by Jack in the Box's corporate headquarters indicated that Alizadeh and the state were working "to resolve issues pertaining to his alleged non-payment of state taxes. "The company is hopeful that the restaurants will re-open shortly to minimize disruption to employees and guests, as well as to the Jack in the Box brand," the statement concluded. According to the Board of Equalization, Alizadeh owes $4 million in delinquent state taxes. The downtown Chico store remained shuttered this morning, with windows and doors bearing a note saying the store was temporarily closed and apologized for the inconvenience. There was no indication when the restaurants might reopen. ###

About Mike Habib, EA

Mike Habib is an IRS licensed Enrolled Agent who concentrates his tax practice on helping individuals and businesses solve their IRS & State tax problems. Mike has over 20 years experience in taxation and financial advisory to individuals, small businesses and fortune 500 companies. Tax problems do not go away unless you take some action! Get Tax Relief today by calling me at 1-877-78-TAXES You can reach me from 8:00 am to 8:00 pm, 7 days a week. Also online at http://www.MyIRSTaxRelief.com

California - Corporate Income Tax: FTB Has Begun Contacting Return Nonfilers for 2007

The California Franchise Tax Board (FTB) has begun contacting more than 35,000 companies that did business in California in 2007, but failed to file a California corporation franchise or income tax return for that year. Businesses contacted by the FTB will have 30 days to file their delinquent tax return or show why one is not due. If no such action is taken, the FTB will issue a tax assessment that may include penalties and fees.

The FTB annually reviews more than 5 million income records from government agencies and financial institutions, and matches them against tax records filed to determine whether some businesses have yet to file. Businesses receiving notices from the FTB may obtain more information by calling the FTB at 866-204-7902. Callers should be prepared to provide their 15-digit notice number.

News Release, California Franchise Tax Board, September 14, 2009

If you owe back taxes to the CA FTB, or the IRS, please call Mike Habib, EA to know your options to resolve your tax matters. You can reach Mike Habib at 1-877-78-TAXES [1-877-788-2937].

IRS Appeals mediation program

A new IRS revenue procedure updates Rev Proc 2002-44, 2002-2 CB 10, which formally established a mediation procedure for cases at the IRS Appeals administrative level. The new revenue procedure expands and clarifies the types of cases that may be mediated by Appeals. Generally, the program is available for cases in which a limited number of legal and factual issues remain unresolved following settlement discussions in Appeals.

IRS Code Sec. 7123(b)(1) provides the statutory authority for the Appeals mediation program. On July 1, 2002, Rev Proc 2002-44, formally established the Appeals mediation procedure. It modified and expanded the availability of mediation for cases that are already in the Appeals administrative process. Rev Proc 2009-44 supersedes Rev Proc 2002-44.

IRS Rev Proc 2009-44 modifies the Appeals mediation program to expand the types of cases that are eligible for mediation while also clarifying the types of cases that are ineligible. Significant changes include:

• Mediation does not create any special settlement authority for Appeals. (Rev Proc 2009-44, Sec. 4.02)
• Mediation may be available for certain offer in compromise and trust fund recovery penalty cases as provided for in Ann. 2008-111, 2008-48 IRB 1224 (see Federal Taxes Weekly Alert 12/04/2008), or any subsequent guidance issued by IRS. (Rev Proc 2009-44, Sec. 4.03(7))
• For offer in compromise cases with liabilities of $50,000 or more, any settlement or agreement reached under Code Sec. 7122(b) must be reviewed by the Office of Chief Counsel. (Rev Proc 2009-44, Sec. 9.02)

IRS Mediation is available for:

• Legal issues;
• Factual issues;
• A Compliance Coordinated Issue (CCI) or an Appeals Coordinated Issue (ACI) but not where the taxpayer has declined the opportunity to discuss the CCI or ACI issue with the Appeals CCI or ACI coordinator during the course of regular Appeals settlement discussions;
• An early referral issue when an agreement is not reached, provided the early referral issue meets the requirements for mediation;
• Issues for which a request for competent authority assistance has not yet been filed.
• Unsuccessful attempts to enter into a closing agreement under Code Sec. 7121; and
• Offer in compromise and trust fund recovery penalty cases as provided for in Ann. 2008-111 , or any subsequent guidance issued by IRS.

IRS Mediation is not available for:

• Cases in which mediation is not appropriate under either 5 USCS 572 or 5 USCS 575, which provide the general authority and guidelines for use of alternative dispute resolution in the administrative process;
• Issues designated for litigation;
• Issues docketed in any court;
• Collection cases, except for certain offer in compromise and trust fund recovery penalty cases as provided for in Ann. 2008-111 or any subsequent guidance issued by IRS;
• Issues for which mediation would not be consistent with sound tax administration;
• Frivolous issues;
• "Whipsaw" issues, such as, issues for which resolution with respect to one party might result in inconsistent treatment in the absence of participation of another party;
• Cases in which the taxpayer did not act in good faith during settlement negotiations; and
• Issues that have been otherwise identified in subsequent guidance issued by IRS as excluded from the mediation program.

Our firm specializes in resolving tax controversy matters. For IRS appeals and tax relief options call Mike Habib at 1-877-78-TAXES

IRS Back Taxes Help for Financially Distressed Taxpayers

IRS Back Taxes - IRS Tax Tip

If you are facing financial difficulties and struggling to meet your tax obligations the IRS can help. As the 2009 tax filing season begins, in addition to new credits, deductions and exclusions, the IRS is taking steps to help people who owe back taxes. Here are some areas where IRS can help:

• Added Flexibility for Missed Payments: The IRS is allowing more flexibility for individuals with existing Installment Agreements who have difficulty making payments because of a job loss or other financial hardship. Depending on the situation, the IRS may allow a skipped payment or a reduced monthly payment amount. Taxpayers in this situation should contact the IRS.

• Additional Review for Offers in Compromise on Home Values: An Offer in Compromise (OIC), an agreement between a taxpayer and the IRS that settles the taxpayer's tax debt for less than full amount owed, may be a viable option for taxpayers experiencing economic difficulties. However, the equity taxpayers have in real property can be a barrier to an OIC being accepted. With the uncertainty in the housing market, the IRS recognizes that the real-estate valuations used to assess ability to pay are not necessarily accurate. So in instances where the accuracy of local real-estate valuations is in question or other unusual hardships exist, the IRS is creating a new, second review of the information to determine if accepting an offer is appropriate.

• Prevention of Offer in Compromise Defaults - Taxpayers who are unable to meet the periodic payment terms of an accepted OIC will be able to contact the IRS office handling the offer for available options to help them avoid default.

• Postponement of Collection Actions: IRS employees will have greater authority to suspend collection actions in hardship cases where taxpayers are unable to pay. If an individual has recently encountered a job loss or other financial problem, IRS assistors may be able to suspend collection in some situations without documentation to minimize burden on the taxpayer.

• Expedited Levy Releases: The IRS will speed the delivery of levy releases by easing requirements on taxpayers who request expedited levy releases for hardship reasons. Taxpayers seeking expedited releases of levies to an employer or bank should contact the IRS number shown on the notice of levy to discuss available options. When calling, taxpayers requesting a levy release due to hardship should be prepared to provide the IRS with the fax number of the bank or employer processing the levy.

If you are behind on tax payments there could be additional help available if you are facing an unusual hardship situation. For assistance with your back taxes contact Mike Habib, EA today at 1-877-78-TAXES.

Keywords: back taxes help, IRS back taxes, back tax relief

What is Self-Employment Tax?

Self-employment tax (SE 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 Schedule SE (Form 1040). Social security and Medicare taxes of most wage earners are figured by their employers. Also you can deduct half of your SE tax in figuring your adjusted gross income. Wage earners cannot deduct social security and Medicare taxes.

SE tax rate. The self-employment tax rate is 15.3%. The rate consists of two parts: 12.4% for social security (old-age, survivors, and disability insurance) and 2.9% for Medicare (hospital insurance).

Maximum earnings subject to SE tax. Only the first $102,000 of your combined wages, tips, and net earnings in 2008 is subject to any combination of the 12.4% social security part of SE tax, social security tax, or railroad retirement (tier 1) tax.

All your combined wages, tips, and net earnings in 2008 are subject to any combination of the 2.9% Medicare part of SE tax, social security tax, or railroad retirement (tier 1) tax.

Fiscal year filer. If you use a tax year other than the calendar year, you must use the tax rate and maximum earnings limit in effect at the beginning of your tax year. Even if the tax rate or maximum earnings limit changes during your tax year, continue to use the same rate and limit throughout your tax year.

Self-employment tax deduction. You can deduct half of your SE tax in figuring your adjusted gross income. This deduction only affects your income tax. It does not affect either your net earnings from self-employment or your SE tax.

How to Pay Self-Employment Tax

To pay SE tax, you must have a social security number (SSN) or an individual taxpayer identification number (ITIN). This section explains how to:

• Obtain an SSN or ITIN
• Pay your SE tax using estimated tax.

Obtaining a Social Security Number. If you never had an SSN, apply for one using Form SS-5, Application for a Social Security Card. You can get this form at any Social Security office or by calling (800) 772-1213. Download the form from the Social Security Online Web site.

Obtaining an Individual Taxpayer Identification Number. The IRS will issue you an ITIN if you are a nonresident or resident alien and you do not have and are not eligible to get an SSN. To apply for an ITIN , file Form W-7, Application for IRS Individual Taxpayer Identification Number.

Estimated Taxes

Federal income tax is a pay-as-you-go tax. You must pay the tax as you earn or receive income during the year. You generally have to make estimated tax payments if you expect to owe tax, including SE tax, of $1,000 or more when you file your return. There are two ways to pay as you go: withholding and estimated taxes. If you are a self-employed individual and do not have income tax withheld, you must make estimated tax payments.

Who Must Pay Self-Employment Tax?

You must pay SE tax and file Schedule SE (Form 1040) if either of the following applies.

• Your net earnings from self-employment (excluding church employee income ) were $400 or more.
• You had church employee income of $108.28 or more.

Your net earnings from self-employment are based on your earnings subject to SE tax. Most earnings from self-employment are subject to SE tax. Some earnings from employment (certain earnings that are not subject to social security and Medicare taxes) are subject to SE tax.

If you have earnings subject to SE tax, use Schedule SE to figure your net earnings form self-employment . Before you figure your net earnings, you generally need to figure your total earnings subject to SE tax.

Note: The SE tax rules apply no matter how old you are and even if you are already receiving social Security or Medicare.

Are You Self-Employed?

You are self-employed if any of the following apply to you.

• You carry on a trade or business as a sole proprietor or an independent contractor.
• You are a member of a partnership that carries on a trade or business.
• You are otherwise in business for yourself.

Trade or business. A trade or business is generally an activity carried on for a livelihood or in good faith to make a profit. The facts and circumstances of each case determine whether or not an activity is a trade or business. The regularity of activities and transactions and the production of income are important elements. You do not need to actually make a profit to be in a trade or business as long as you have a profit motive. You do need, however, to make ongoing efforts to further the interests of your business.

Part-time business. You do not have to carry on regular full-time business activities to be self-employed. Having a part-time business in addition to your regular job or business also may be self-employment.

Example. You are employed full time as an engineer at the local plant. You fix televisions and radios during the weekends. You have your own shop, equipment, and tools. You get your customers from advertising and word-of-mouth. You are self-employed as the owner of a part-time repair shop.

Sole proprietor. You are a sole proprietor if you own an unincorporated business by yourself, in most cases. However, if you are the sole member of a domestic limited liability company (LLC), you are not a sole proprietor if you elect to treat the LLC as a corporation. For more information on this election and the tax treatment of a foreign LLC, see Form 8832, Entity Classification Election.

Independent contractor. People such as doctors, dentists, veterinarians, lawyers, accountants, contractors, subcontractors, public stenographers, or auctioneers who are in an independent trade, business, or profession in which they offer their services to the general public are generally independent contractors. However, whether these people are independent contractors or employees depends on the facts in each case. The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done. The earnings of a person who is working as an independent contractor are subject to SE tax.

You are not an independent contractor if you perform services that can be controlled by an employer (what will be done and how it will be done). This applies even if you are given freedom of action. What matters is that the employer has the legal right to control the details of how the services are performed.

If an employer-employee relationship exists (regardless of what the relationship is called), you are not an independent contractor and your earnings are generally not subject to SE tax. However, your earnings as an employee may be subject to SE tax under other rules discussed in this section.

For more information on determining whether you are an independent contractor or an employee, refer to the section on Independent Contractors vs. Employees

Earned Income Tax Credit

If you file a Form 1040 Schedule C, you may be eligible to claim the Earned Income Tax Credit (EITC). Learn more about EITC, or use the EITC Assistant to find out if you are eligible.

Tax debt relief services offered by Mike Habib, EA. Call for your free tax relief analysis at 1-877-78-TAXES

Employee vs. Independent Contractor - Ten Tips for Business Owners

IRS Tax Tip

If you are a small business owner, whether you hire people as independent contractors or as employees will impact how much taxes you pay and the amount of taxes you withhold from their paychecks. Additionally, it will affect how much additional cost your business must bear, what documents and information they must provide to you, and what tax documents you must give to them.

Here are the top ten things every business owner should know about hiring people as independent contractors versus hiring them as employees.

1. Three characteristics are used by the IRS to determine the relationship between businesses and workers: Behavioral Control, Financial Control, and the Type of Relationship.

2. Behavioral Control covers facts that show whether the business has a right to direct or control how the work is done through instructions, training or other means.

3. Financial Control covers facts that show whether the business has a right to direct or control the financial and business aspects of the worker's job.

4. The Type of Relationship factor relates to how the workers and the business owner perceive their relationship.

5. If you have the right to control or direct not only what is to be done, but also how it is to be done, then your workers are most likely employees.

6. If you can direct or control only the result of the work done -- and not the means and methods of accomplishing the result -- then your workers are probably independent contractors.

7. Employers who misclassify workers as independent contractors can end up with substantial tax bills. Additionally, they can face penalties for failing to pay employment taxes and for failing to file required tax forms.

8. Workers can avoid higher tax bills and lost benefits if they know their proper status.

9. Both employers and workers can ask the IRS to make a determination on whether a specific individual is an independent contractor or an employee by filing a Form SS-8 - Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding - with the IRS.

10. You can learn more about the critical determination of a worker's status as an Independent Contractor or Employee at IRS.gov by selecting the Small Business link. Additional resources include IRS Publication 15-A, Employer's Supplemental Tax Guide, Publication 1779, Independent Contractor or Employee, and Publication 1976, Do You Qualify for Relief under Section 530? These publications and Form SS-8 are available on the IRS Web site or by calling the IRS at 800-829-3676 (800-TAX-FORM).

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California - Multiple Taxes: Wildfire Relief Extended to Taxpayers in Three More Counties

For taxes and fees they each administer, the California State Board of Equalization (BOE) and the Employment Development Department (EDD) have extended relief to qualifying taxpayers and fee payers who have been affected by wildfires in the counties of Los Angeles, Monterey, and Placer. Both agencies have recently extended similar relief for those affected by wildfires in Santa Cruz and Yuba counties, as reported.

EDD Relief

Employers in Yuba County who were directly affected by the damage resulting from the fire may request up to a 60-day extension of time from EDD to file their state payroll reports and/or deposit state payroll taxes without penalty or interest. Written request for extension must be received within 60 days from the original delinquent date of the payment or return to file or pay. Related information is available on the EDD Web site at http://www.edd.ca.gov/Payroll_Taxes/.

BOE Relief

For taxes and fees it administers, the BOE is giving extensions for filing, audits, billing, notices, and assessments, and relief from subsequent penalties to any individual or business that, as a result of the recent wildfires in Los Angeles, Monterey, and Placer counties, cannot meet tax filing and payment deadlines. A state of emergency was declared in each of the counties due to the wildfires.

Affected taxpayers and fee payers can get special relief in the form of a one-month extension of time to file or pay taxes and fees. Deadlines also are extended for filings that were delayed by the disruption of the normal activities of the U.S. Postal Service or other private mail and freight companies.

Relief from interest and penalties may be provided for those persons who are unable to file their returns or pay taxes and fees in a timely manner. Business owners and fee payers also can replace copies of BOE tax records at no charge.

Relief from the interstate user tax under the International Fuel Tax Agreement applies only to California tax. Also, any claim in either county for property tax relief must be filed with the county assessor's office.

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CEO of Long Distance Phone Service Reseller Personally Liable for Unremitted Taxes (Brinskele, FedCl)

An individual who was the chairman, president and CEO ("the CEO") of a company that resold long distance telephone service had to pay the IRS an assessed penalty plus interest. The term "markup," in the context of the litigation, referred to the margin between the price at which the company purchased long distance minutes and the higher price at which it resold them. The assessed penalty amount represented the portion of the Code Sec. 4251 communications excise tax collected by the company from its customers on the markup.

In the court's previous opinion (2006-2 USTC 70,261), it held that the company had an obligation to pay over to the IRS any monies it collected for long distance telephone service even if that service was improperly taxed. Here, the "overwhelming evidence," indicated that the company did in fact collect the Code Sec. 4251 tax on the markup but failed to remit it to the IRS. Further, the CEO was a responsible person for purposes of Code Sec. 6672. In addition to being the company's CEO, he was its founder, at times its controlling shareholder, and for a period of time signed many of its checks. Finally, the CEO acted willfully in failing to pay the Code Sec. 4251 tax to the IRS; therefore, he was personally liable for the unpaid taxes. He both knew of his obligations to remit the tax collected on the markup and showed a reckless disregard of the company's tax responsibilities by failing to do so.

Related opinion at 2006-2 USTC ¶70,261.

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Clarification of the "Cash for Clunkers" Tax Rules

September 2009 - The federal "Cash for Clunkers" program has generated a lot of interest among consumers and we have received many inquires about the tax implications of this popular program. As a result, we are clarifying state tax rules for people who trade in their used vehicle under the "Cash for Clunkers" program.

The "Cash for Clunkers" program, Federal law, H.R. 2346, The Consumer Assistance to Recycle and Save Program, allows qualifying consumers to receive a $3,500 or $4,500 voucher from the federal government when they trade in qualifying old vehicles and purchase or lease a new one. This federal law provides the value of the voucher received by the consumer is not considered as gross income of the purchaser for purposes of the federal income tax.

California law does not conform to H.R. 2346. For state income tax purposes trade-ins are treated as normal sales or exchanges, and in some cases the value of the voucher received may be subject to state tax. That is to say, the person subtracts his or her basis (generally the cost of the used vehicle) of the car traded-in from the amount realized (the applicable voucher amount, plus any other salvage value the dealer offers as part of the exchange) to determine whether a gain or loss was realized on the disposition of the used vehicle. For example, if the family car was originally purchased for $19,500 and traded in for a $4,500 discount under the "Cash for Clunkers" program, there is no taxable gain. The $15,000 difference is a personal loss under tax law and may not be deducted for tax purposes. However, if the family car was purchased for $3,000 and it was traded in for a $3,500 discount, the $500 difference needs to be reported as income for state tax purposes.

Different tax rules apply for vehicles used in a person's trade or business. For example, when a person trades in the old company truck for a new company truck, under the "Cash for Clunkers" program, the gain or loss could be postponed for tax purposes under the "like-kind exchange" rules.

Any scrap value received by the consumer for the trade-ins is also used in computing the gain or loss from these sales or exchange transactions.

We will provide instructions about how to report taxable gains for the "Cash for Clunkers" program in its tax return instructions when the 2009 tax forms are published later this year. Taxpayers and practitioners can check FTB's website at ftb.ca.gov for tax forms and other helpful information.

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IRS May Mine Mortgage Data To Flush Out Tax Cheats

Source: Dow Jones

WASHINGTON -(Dow Jones)- The Internal Revenue Service might scrutinize mortgage interest data more closely to help catch tax cheats, after prompting from an IRS auditor.

The tax collector said it will study whether it should make greater use of mortgage interest data provided to the IRS by banks, to target audits against individuals who do not file tax returns, according to a letter released Monday by the Treasury Inspector General for Tax Administration.

However, a stepped-up IRS focus on homeowners whose reported income falls below their mortgage interest obligations could attract criticism at a time when many have fallen behind on mortgage payments.

TIGTA said in a Monday report that tens of thousands of homeowners who paid more than $20,000 in mortgage interest in 2005 either did not file a tax return or reported income that appears insufficient to cover their mortgage interest and basic living expenses.

Based on a sample of these returns, non-filers and potential under-reporters identified by TIGTA could have owed a combined total of $1.4 billion in tax, penalties in interest, the auditor said.

Banks report data on mortgage interest paid by individuals to the IRS and to the homeowner, using IRS Form 1098.

Through an existing program, the IRS already sends notices to non-filers that it believes, based on income and mortgage interest data, should have filed a tax return. Through that program, the IRS has assessed an additional $276 million in taxes for tax year 2005.

But TIGTA said the IRS should boost scrutiny of mortgage interest data in selecting cases for individual audits.

The IRS said it will expand a regional research project, known as a Compliance Initiative Project, on mortgage interest to a nationwide level by December 2011.

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