CPA 2.0 The Next Generation

FORM 1099 PENALTIES INCREASED

The Small Business Jobs Act of 2010 has dramatically increased penalties for late filing of information returns.  The change refers to Forms 1099 and other information returns required to be filed after December 31, 2010.  The Internal Revenue Service (IRS) aims to improve the reporting of income by recipients, like independent contractors, on their Forms 1040 and thus, improve collection of taxes. 

 

            Forms 1099 are required to be filed with the IRS by February 28.  A first tier penalty applies if you file after February 28 but on or before 30 days later.  The tier one penalty before was $15 per return, but now it is $30 per return, and the maximum limit is increased from $75,000 to $250,000.  Tier two and three penalties apply to late filings after the 30-day date through August 1 and after August 1, respectively.  In summary:

 

                                                Prior Law                                             New Law

            Tier One          $15 each            $75,000 max.                         $30 each            $250,000 max.

            Tier Two          $30 each          $150,000 max.                       $60 each            $500,000 max.

            Tier Three        $50 each          $250,000 max.                       $100 each        $1,500,000 max.

 

            For small businesses (firms having average annual gross receipts for the most recent three tax years that don't exceed $5 million), the calendar year maximum is increased from $100,000 to $500,000 for the third-tier penalty, from $25,000 to $75,000 for the first-tier penalty, and from $50,000 to $200,000 for the second-tier penalty.

 

            The Act increases the minimum penalty for each failure due to intentional disregard from $100 to $250.  This penalty applies regardless of the period of the failure.

 

            Another reason not to ignore the filing requirement is two new questions that appear on the 2011 Schedules C and F and Forms 1065 and 1120.  First, did your business make "any payments in 2011 that would require it to file Forms(s) 1099?"  Second, if yes, did or will your business file all required Forms 1099?   

 

NEW YEAR TAX SAVINGS FOR EMPLOYEES

Employees have some special tax-saving considerations to take into account that retirees and other nonworking individuals don't face.  Below are three of those opportunities.  Please contact us if you need additional information on these items.

 

Adjustments to federal withholding

            Consider adjusting your federal withholding if you usually have a balance due when you file your return and face a penalty for underpayment of federal estimated tax.  Perhaps a raise in salary has put you in a higher tax bracket.  You can eliminate the penalty and save the pain of a large payment by having a little more withheld each payday.  Also, consider an adjustment if you have multiple jobs, both you and your spouse work or you can be by another person as his dependent. 

            Payroll departments are usually willing to adjust the withholding at any time during the year.  Just an adjustment of $50 each payday twice a month will give you $1,200 additional in federal income tax payments for the year.

 

401(k) contributions

            If you are not already contributing the maximum to your 401(k), you can reduce your 2012 tax bill by increasing your contribution.  You already know that earnings in a qualified retirement account are not taxed currently, but, don't forget that the amount you contribute this year reduces you taxable income this year, dollar for dollar.  The maximum employee contribution for 2012 is $17,000, with an additional catch-up amount of $5,500 for those age fifty and over.

 

Health flexible spending account

            This is a good time of year to review the amount that you will direct in 2012 to a health flexible spending account (health FSA).  Look at last year's expenditures and consider any anticipated change in circumstances in 2012. 

            You save taxes because you use pre-tax dollars to pay for medical expenses that might not be deductible on your tax return.  They would not be deductible if you do not itemize.  Even if you do itemize, some medical expenses would not be deductible because of the 7.5% adjusted gross income floor.  Also, a health FSA can be used to get tax-free reimbursement for over-the-counter medications and other items even though they would not be deductible as medical expenses if you paid for them outside of a health FSA.

            Mark your calendar to review your balance in December so that you can incur reimbursable expenditures to prevent loss of any unused amount under the use-it-or-lose-it feature of these plans.