We want to make sure you’re on the right side of the law when it comes to filing your taxes, so in this article, we explain what tax avoidance and tax evasion are, what the difference is between the two, and a few ways you can minimize your taxes legally. What Is Tax Avoidance? Tax avoidance is structuring your business transactions so you can lower your tax bill. Tax avoidable is legal and wise. A common example of tax avoidance includes maximizing your retirement contributions, such as IRAs and 401(k)s. What Is Tax Evasion? On the other hand, tax evasion is attempting to deceive the IRS in an effort to lower your tax bill. Tax evasion is illegal. Common examples of tax evasion are failing to report all or some of your income, concealing business assets, or pretending personal purchases were made for business purposes. The Difference Between Tax Avoidance and Evasion The primary difference between tax avoidance and evasion is the intent. The intent behind tax avoidance is to only pay what taxes you legally need to pay and not a penny more. The intent behind tax evasion is to commit fraud. How To Minimize Taxes Legally There are three ways to minimize how much you pay in taxes: Reduce your taxable income – Claiming deductions can lower your taxable income. You can also hire contractors instead of employees, donate to charity, create a retirement account, and more. Maximize tax deductions and credits – Credits reduce your tax bill dollar-for-dollar while deductions reduce your tax bill by a percentage according to your tax bracket. Time income and deductions appropriately – You may change tax brackets from tax year to tax year, so timing your income and deductions accordingly can help you save money. What if You Make a Mistake? Mistakes happen. That’s why we offer corrections filing for 1099, 1098, W‑2, and Affordable Care Act forms. The best course of action is to correct the mistake as soon as possible. If you make a mistake …
5 Common Tax Problems and How to Avoid Them
Taxes are confusing, and they change every year. Let’s go through some common tax problems and how to avoid them. Filing Late 1 in 5 taxpayers waits to file their taxes until just one week before the (typical) April 15th deadline. Missing the filing deadline is expensive: if you fail to file on time, you can expect to pay a penalty of 5% of the unpaid tax for every month or part of a month that the return is late, up to 25% of the unpaid tax. To avoid this, the best practice is to file early. Start thinking about tax prep in January, whether that means gathering your documents and sending them to your preferred tax preparer or gathering all documentation and applicable forms for completing your return yourself. However, if you think you are going to miss the deadline, you should always file for an extension. You can file Form 4868 to push the filing deadline back 6 months – but you still need to pay any taxes you still owe at the same time that you file for the extension. Click here for accurate deadline dates. Typos & Missing Information There are lots of boxes to check and lines to fill out, and it’s very easy to accidentally mess up your SSN or report your income as $52,986 instead of $52,896. Errors that occur when filling out the complicated and often numerous tax forms are very common. To avoid this, you should always go through your forms slowly and deliberately, and also more than once. A good double-check is often the best way to fix errors before you file. Be sure to reference your tax forms and banking information (routing and account numbers) to ensure all the data is correct and present. If you are unsure how to find certain information or are looking for a second opinion, you can always contact a trained tax professional to have them check your work. Miscalculations Because it’s so easy to make small but mighty mistakes when you are entering your information on the appropriate forms, it also means that it’s very easy to file a …
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Is TIN Checking Necessary?
Many e-filing services provide TIN checking as an additional service to e-filing and paper filing. But what is the service? And is it necessary? Many of our customers ask these questions when they use eFile360 to file their 1099s and related forms for the first time. Most customers want to be informed before they complete their order while others are suspicious of add-ons in general. So we wanted to clear the air: TIN checking isn’t necessary to file your 1099s, but this service can save you a lot of headaches. What is a TIN? A TIN is a Taxpayer Identification Number. It is also called a “95-number” or “tax-ID” number. A TIN is an umbrella term that means the following: Social Security Number (SSN) Employer Identification Number (EIN) Individual Taxpayer Identification Number (ITIN) Adoption Taxpayer Identification Number (ATIN) Preparer Tax Identification Number (PTIN) Business owners typically use their EIN to file business taxes and their SSN to file their personal taxes, but this may differ based on your unique situation. When it comes to filing 1099s, 1098s, ACA forms, and W-2s, business owners need to know the TIN for each employee, freelancer, and independent contractor that works for them. Tip: While you may only need to file a form if you pay that employee or contractor $600 within a calendar year, it’s always best to document their TIN before they start working for you. This way, you know that you have their TIN on file way before tax season. What is the TIN Error Reconciliation Process? When it comes to tax reporting, it’s vital that all of the information you file is accurate – including the TINs of your employees and contractors. This is where the TIN error reconciliation process comes into play. This process is three-fold: Check your records Use a TIN checking service, which efile360 offers File Form 1095-C when you find TIN errors The first portion of this process involves you double-checking …
ACA Penalties & Deadlines for Tax Year 2020
The IRS issues penalties for employers who do not comply with the Affordable Care Act (ACA) Employer Mandate. For the 2020 tax year, the penalties have increased. What are the ACA penalties? Monetary penalties for filing late If you file ACA forms to the IRS after the deadline, you will be charged a minimum of $50 per return. At maximum, you may be charged $550 per return filed late. The amount increases by the number of returns not filed and the length of time it takes you to file them after the deadline. According to ACA Times, if you file late for tax year 2020, you can expect to pay the following penalty amounts: $50 per return filed late if you file within 30 days of the deadline; the penalty amount will not exceed the annual maximum, $556,500 $110 per return filed late if you file 31 or more days late, but before August 1, 2021; the penalty amount will not exceed the annual maximum, $1,669,500 $270 per return filed late when filed after August 1, 2021; the penalty amount will not exceed the annual maximum, $3,339,000 $550 per return if the IRS believes that you are intentionally disregarding this mandate; the penalty amount for this has no annual maximum However, if your gross receipts for the past three years are $5 million or less, you would be charged the same penalty amounts with lower annual maximums. Penalties for failing to comply with the ACA Employer Mandate According to Freeman Law, there are two types of penalties for employers who disregard the ACA Employer Mandate: A. When an applicable large employer (ALE): Does not offer coverage Offers coverage to less than 95% of its full-time employees and their dependents Has at least one full-time employee who receives a premium tax credit to help pay for coverage through a Marketplace Exchange B. When an ALE offers coverage to at least 95% of its full-time employees and their dependents, but at least one full-time employee receives a premium tax credit to …
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1099-MISC and 1099-NEC Mistakes and How to Avoid Them
With the introductions of the 1099-NEC for the 2020 tax year, there are many common 1099 filing mistakes, but they can be easily avoided with some research and planning. 1099-MISC and 1099-NEC Common Mistakes One of the common mistakes that we’ll see a lot next year is the confusion about which 1099 form to use, MISC vs. NEC. The MISC form is largely unchanged, but the non-employee compensation will now be reported on the NEC form instead. This includes all the payments made to independent contractors for services and products related to that service. Next to completing the wrong form, not verifying the TIN (taxpayer ID number) is another easy mistake to make. This will cause all IRS reporting to be off, often resulting in penalties that a business, its contractors, or both may have to deal with. Filing a paper return, while not inherently a mistake, may result in late fees and penalties if the number of forms filed exceeds the IRS limit of 250. This count is per form, so you can file 10 1099-MISC and 130 1099-K forms with no trouble, but if there are 265 1099-NECs, the NEC forms must be e-filed. If you find yourself making any of these mistakes, it might be good to figure out what the filing penalties are and how to correct the issues. If there are errors in your 1099 forms, click here to learn how to correct them. How to Avoid Them Many of these mistakes can be avoided by doing some research about the different forms and their due dates. Double-check all information you will be reporting, especially the TIN. Having a professional individual or service look over your 1099s can also be a cost-effective way to avoid common 1099 filing mistakes and ensure all your forms have been filled out and submitted correctly federally and by state. If you think e-filing these forms is confusing, eFile360 can help. For more information about electronic filing, sign up for a free eFile360 account. …
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Form 1099-NEC Best Practices for CPAs
As a CPA, if you’re preparing Form 1099-NEC for your clients, then you need to know the latest best practices. Start preparing for tax year 2020 now with these tips. Review How Your Clients’ Income is Mapped With the return of Form 1099-NEC, you will need to pay close attention to how you map your clients’ income. You will need to adjust how you map their income and adjust your routine from previous years to split non-employee compensation and other miscellaneous payments. Ideally, you will map out whether your current process for Form 1099-MISC is accurate, adjust it accordingly, and then split off the necessary variables for Form 1099-NEC. Accurately mapping your clients’ income ensures that you report the correct amounts on the right forms at the right time. Specific situations that you may want to pay close attention to include: Lawyer payments Other income Real estate payments, such as rent Be Aware of Penalty Increases Among the many changes that the return of Form 1099-NEC brings, the penalties are changing, too. In general, they continue to increase for late or inaccurate reporting. Find out more about 1099 penalties here. According to Moss Adams, “For 2019 filings, penalties are applied at $50 for information return reports filed after the deadline but within 30 days, and they increase to $110 for returns filed after 30 days beyond the deadline but before August 1, 2020. Information return reports filed incorrectly after August 1, 2020, or not at all, will have a penalty of $270 per form.” Encourage Payment and Withholding Tracking Whether you’re meeting with clients before tax year 2020 or not, it’s important to inform them that they need to separately track nonemployee compensation and other 1099 payments. The sooner you tell your clients this and show them how to do so, the easier the next tax season will be for you and your clients. Equally as important is to note the difference for state income and withholding as it …
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