In 2010 a previous employer informed that they were forcing me to take my 401K contributions out of their plan and roll it into another IRA of my choosing. According to their rules, I had enough capital in the account such as they couldn’t force me to take an early distribution, but not so much that they couldn’t force me out of the employer-subsidized account.

I procrastinated getting in the necessary paperwork with instructions as to which provider to transfer funds to. The funds were subsequently sent to E-trade securities, LLC. rolled into an IRA rollover account. I then had E-trade perform an ACAT transfer to my preferred carrier.

I also moved other assets from UBS to AIG/Valic. However, in this instance, I requested UBS disburse me an early distribution check, due do the fee-free transaction. I immediately mailed the capital to AIG via personal check after the EFT disbursement from UBS cleared my checking account.

Now, it appears that I should be receiving a few Form 1099 as well as Form 5498. I’ve currently already received the 1099 forms but no 5498′s. How does this affect my filing? Are there any special tax forms that need to be prepared? How do I account for these transactions, although all funds/distributions were completely rolled into qualifying IRA plans, given the fact that I’m being told that the Form 5498 won’t be sent until after May31st and the 2010Tax deadline is April15th? Wheh!

I say:

First, I feel like I should apologize since David’s been waiting quite a while for a response—he may have even received those 5498s already.

So, Davide, my apologies. This year, tax season started with a bang. And it started out with really complex returns that took more research than normal, so sleep has been very hard to come by. But, alas, here’s my response, and I hope it helps.

Employers are required to give those individuals that participate in their plans an option to have an eligible rollover distribution paid directly to a traditional IRA, so long as the amount of the distribution isn’t less than $200.

Let me explain what a Form 5498, IRA contribution Information, is. Like it’s name suggest, it reports information on contributions, rollovers, conversions, and recharacterizations to both you and the IRS. It also reports the FMV of the account at the end of the year, which is needed mostly for required minimum distribution purposes and in calculating the taxable portion of an IRA distribution.

The amounts of each distribution is reported to you and the IRS on Form 1099-R. So on Form 1040, you report the total distribution shown on line 16a, and the taxable amount on line 16b for all except distributions from an IRA—those distributions get reported on line 15a, with the taxable portion on like 15b. You’ll know if they belong on line 15 if the IRA checkbox in box 7 of the 1099-R is checked.

If all the distributions were rolled over to a retirement account, whether directly from one trustee to the next, or through a complete distribution to you and then transferred to another account then the amounts shouldn’t be taxable.

I’ve given you a pretty quick and dirty response to qualified plan distributions. Your age, whether they were rolled over within 60 days of the distribution, and a number of other factors can come into play. You should definitely check with your accountant regarding how these distributions will affect your specific tax situation.

Disclaimer: like any decent tax professional will tell you, since you’re not currently a client of mine—though you can be—it’s almost impossible to provide complete and accurate tax advice over the internet without being aware of the taxpayer’s entire situation; therefore, I suggest you consult your tax professional before relying solely on any information provided on this site.

My 16-year-old son earned $1,250.00 in modeling income this year. He was issued a 1099-MISC and his income was reported in Box 7. Does he have to report this income and pay a self employment tax?

Initially when I first started reading your e-mail, I thought it was going to be a kiddie tax issue. Thank Goodness it’s not. To answer your question, in one word, yes.

For dependents — and at 16, I imagine he’s still someone’s dependent — a return is usually not required unless any of the below apply:

• Unearned income (think dividends, interest, etc.) was over $950.
• Earned income was over $5,700
• Gross Income exceeded the larger of $950 or earned income (not to more than $5,400) plus $300

And since the income your son received is considered earned income, and it wasn’t more than $5,700, on that front he’s fine.

Now, even if the above criteria aren’t met, as long as your son earned more than $400 of self-employed income, then he’s required to file a return and report self-employment tax.

Self-employment taxes are simply the employer and the employee portion of social security and medicare taxes. Both of which would have been deducted from wages if you receive a paycheck. Your employee would then match these taxes (except for in 2010).

Quick note: When I originally published this post, I neglected to mention the implications of self-employment tax.

Disclaimer: like any decent tax professional will tell you, since you’re not currently a client of mine—though you can be—it’s almost impossible to provide complete and accurate tax advice over the internet without being aware of the taxpayer’s entire situation; therefore, I suggest you consult your tax professional before relying solely on any information provided on this site.

Hello and thank you for your helpful website! I have been unable to find an answer to this question and I hope you can help.

I live in California and work part-time for a small business that is a corporation. I will be moving to Texas and my current employer and I have agreed that I would begin working for myself as an accountant. I will get a business license and be working for the same company as a bookkeeper. I will set my own schedule and help with payroll taxes and basic accounting for the company.

My question is this: Will there be any difficulty in my being a W-2 employee and 1099 Independent Contractor in the same year? For my employer or myself?
Also what forms should I fill out to make sure everything is legal and kosher?

I have researched this subject on irs.gov and I will qualify as a Independent Contractor as far as I can tell. Being the one who dictates how, when and why I do things for the company and no longer an hourly employee answering the phones and setting appointments. Also I may expand in the future to other small business (in Texas most likely) that will allow me the same freedom to work online from home as an accountant or bookkeeper.

First, congratulations are in order. Making the move from employee to self-employed is quite an accomplishment.

It seems like you’ve obviously done your homework on the independent contractor classification. Nowadays, the IRS will tend to look at the level of control you have regarding the work being performed. There are 20 factors that the IRS will consider when determining who qualifies as an independent contractor—from things such as whether you set your own hours, perform the work on your clients’ premises, work for more than one person, etc. The full list with a bit of guidance can be found here.

It sounds like you should be fine, and there is absolutely nothing wrong with you going from an employee to an independent contractor in the same year. I know of a few instances where employees have gone from being employees, to freelancing on the side, to being full-time self employed—all in the same year. In a couple of those situations, their employer ends up being one of their clients.

As for the what you should do, definitely apply for an EIN, if you haven’t already done so—it’s fast, and you’ll have the number in minutes. It also wouldn’t hurt to have some kind of contract or written agreement, such as an engagement letter. Also, give them a signed copy of a W9.

Good luck and enjoy being an entrepreneur!

Disclaimer: like any decent tax professional will tell you, since you’re not currently a client of mine—though you can be—it’s almost impossible to provide complete and accurate tax advice over the internet without being aware of the taxpayer’s entire situation; therefore, I suggest you consult your tax professional before relying solely on any information provided on this site.

Taxpayer asks:

I was sued in 2010 for a divorce that never went through. I spent $3,000 in atty fees. I am self-employed as a Physical Therapist independent contractor. Is there anywhere I can legitimately deduct the $3,000 in fees paid to protect my business accounts and assets?

Legal fees can be split into two categories: personal and business. Legal fees incurred in connection with a business are always deductible—so long as the expenses are ordinary and necessary. However, with the exception of fees paid in connection with collecting alimony or for tax advice, those fees that are personal in nature are generally not deductible.

In the case of a divorce, legal fees are almost always considered personal expenses, and, as such, are not deductible. This is true even if it affects your business.

At this point you’re probably saying to yourself, “but I paid the fees to defend my business assets; shouldn’t I be able to deduct this as a business expense?” I hear you. But unfortunately the Tax Court doesn’t agree. They previously ruled that whether or not legal fees are deductible depend on how the claim originated, not the consequences should you fail to defeat the calm.

From what I can tell, the fees you incurred were solely because of the divorce, which is personal in nature, and, therefore, isn’t deductible as a business expense.

Also, keep in mind that if you were allowed to deduct the fees as a personal expense, you only get to deduct the amount that exceeds 2% of your adjusted gross income (AGI). This means that unless your AGI exceeded $150,000, you wouldn’t be able to deduct any portion of the $3,000 expense (150,000 x 2%=$3,000).

I’m sure this wasn’t the answer you were hoping for, but such is the case sometimes when it involves the tax code. Good luck with you business!

Disclaimer: like any decent tax professional will tell you, since you’re not currently a client of mine—though you can be—it’s almost impossible to provide complete and accurate tax advice over the internet without being aware of the taxpayer’s entire situation; therefore, I suggest you consult a tax professional before relying solely on any information provided on this site.

I was audited last year, but with all the moving, I never received my audit paperwork, can I still file this year or do I need to take care of the audit first

While getting audited isn’t fun, having to also pay penalty and interest for late filing a return would be even worse. So go ahead and file your 2010 return.

While you’re at it, reach out to the IRS examiner that was handling your audit to find out the status. An audit is just not something you want hanging over your head.

If the audit is still pending, depending on your circumstances, you may even want to hire a tax professional to assist with the audit.

Good luck!

Disclaimer: like any decent tax professional will tell you, since you’re not currently a client of mine — though you can be — it’s almost impossible to provide complete and accurate tax advice over the internet without being aware of the taxpayer’s entire situation; therefore, I suggest you consult a tax professional before relying on any information provided on this site.

We have always filled out 1099-Misc forms for all of our artists who earn more than $600. I have an artist who is insisting that she doesn’t need to provide her tax ID # to us because her artwork is a good and not a service and therefore does not fall under the 1099 form. Can you help me resolve this?

Ken, the quick answer is she’s right, but not for long.

You’re normally required to issue a Form 1099-Misc to all non-employees that you pay more than $600 for services — corporations are generally exempt. Since her artwork is a tangible product and not a service, it doesn’t fit the requirement for non-emloyee compensation.

However, starting in 2012, a 1099-Misc will have to be issued for practically everything. The exemption for corporations and payments for products will no longer apply. So any business that buys products from, say their local office supply store, will have to issue a 1099-Misc to them so long as they make payments of over $600 in any given year. I know, it’s absolutely ludicrous, which is why so may people and organizations are completely against it. It places an unnecessary burden on small business especially.

You don’t need to issue her a 1099-MISC for 2011, but starting in 2012, she — and all the other artists you work with — will have to provide you with her Taxpayer ID so you can issue her a 1099-Misc if you pay her more than $600. And you will also be required to issue a 1099-Misc to any business that your gallery pays more than $600, corporation or not.

Hope that helps.

Disclaimer: like any decent tax professional will tell you, unless you’re an actual client of mine — and currently you’re not — it’s almost impossible to provide complete and accurate tax advice over the internet without being aware of the taxpayer’s entire situation; therefore, I suggest you consult a tax professional before relying on any information provided on this site.

I’m the sole member of an LLC, can I take a charitable deduction on my business return for cash and services I provide to my church?

I get this question quite often.  And like most things involving tax, the answer is yes and no.   Charitable contributions of cash are deductible, but not on your Schedule C.  Instead, they’re deductible on your Form 1040, Schedule A.  This isn’t simply due to the fact that you’re an LLC.  In fact, the only business entity that can deduct charitable contributions on their tax return is a C corporation.  Every other entity, whether it’s an S Corporation, an LLC, or a partnership, has the amount contributed “flow through” to each member’s personal return.

I should add that most business owners confuse advertising expenses with charitable contributions of cash. Oftentimes, a business owner may “donate” cash to a local church or other charitable organization and, in turn, the business will get an ad placed on the organization’s website or in pamphlets.  In this event, just because the organization is a charity doesn’t mean that payments to them automatically get classified as a donation. Actually, as long as (a) the payment is for an expense that is directly related to a taxpayers business and (b) there is a reasonable expectation of financial return commensurate with the payment or transfer, then it can be deducted under Code Sec. 162—just like other normal business expenses—since this would actually be considered a valid business expense and not a charitable contribution since your business received something in return for your donation: advertising.

Please note that if you have a charitable contribution and a business deduction within the same transaction, no part of the payment can be deducted as a business expense.  As an example, if you donate $500 to a religious organization, and you then receive ad space on their website that they would normally sell for $200, that $200 could not be deducted on the business return as advertising. Your charitable contribution deduction would be limited to the $300—the amount that exceeded the value of the services or products you were provided. And that amount, unless the business is a regular corporation, would be deducted on Form 1040, Schedule A.

However, if instead of one transaction, you had two separate transactions, one for a valid donation of $300 and the other for advertising of $200, then each would be deducted as they would normally—as a charitable contribution and a business expense, respectively.

The last thing I want to make clear is that donations of time or services are never deductible.  This is true even if you can easily value the time or services you provide. If I had a dime for every time I got asked this question…

Disclaimer: like any decent tax professional will tell you, since you’re not currently a client of mine—though you can be—it’s almost impossible to provide complete and accurate tax advice over the internet without being aware of the taxpayer’s entire situation; therefore, I suggest you consult your tax professional before relying solely on any information provided on this site.

IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.