 Income tax 2023-2024. Information returns. Get ready and some coffee so we can recognize the quacks while doing Income Tax Preparation 2023-2024. First, a word from our sponsor. Yeah, actually we're sponsoring ourselves on this one because apparently the merchandisers they don't want to be seen with us. But that's okay, whatever, because our merchandise is better than their stupid stuff anyways. Like our, trust me, I'm an accountant product line. Yeah, it's paramount that you let people know that you're an accountant because apparently we're among the only ones equipped with the number crunching skills to answer society's current deep complex and nuanced questions. If you would like a commercial free experience, consider subscribing to our website at accountinginstruction.com or accountinginstruction.thinkific.com. This information comes from publication 334 tax guide for small business for individuals who use Schedule C tax year 2023, which you could find on the IRS website at irs.gov, irs.gov. Looking at the income tax formula, remember in the first half of the income tax formulas, basically a funny income statement. Most income statements having income minus expenses resulting in net income here having income minus various deductions resulting in taxable income. Notient the schedule C rules into line one income, which is a little funny because the schedule C itself is basically an income statement having business income minus business expenses. The net business income in essence rolling into line one income of the income tax formula. Here is page one of the form 1040 where the schedule C ultimately rules into line eight additional income from schedule one. Here is the schedule one additional income and adjustments to income part number one where the schedule C ultimately rules into line three business income or loss from the schedule C. Here is the schedule C profit or loss from business, which has basically an income statement format or P&L profit loss format income minus expenses. All right, so now we're going to be taking a look at information returns. So remember, we're talking about federal income taxes, the things that fund the federal government, which should be spent mainly on protecting us like the military, for example, primary funding tool being the income tax. The federal income tax. We have seen that we have other taxes. However, as well, those being like the equivalent of payroll taxes, social security and Medicare also on the federal side where if we file a schedule C having self employment will be paying in the form of the self employment tax. And then we also saw that we could have, of course, state taxes for state and local things, taking care of things like instead of the military, the police and whatnot. And then we saw excise taxes, which could be things for certain businesses regulating certain areas like the road or tobacco or alcohol and that kind of stuff. Now we have these information returns, which you might say at first glance, don't look like things that we need to do for our federal income tax purposes. Because you would think all I need is my income statement income minus expenses to fill out my schedule C, which will then to help me to calculate my federal income tax on the form 1040 as well as my self employment tax, social security and Medicare on the schedule SE. But the information returns are generally there to give information, say about other people who you're doing business with. So you can kind of imagine the IRS is coming after you kind of like you're a criminal and they've got the cops have you into the into the interrogation room. And they're like, who's your who's your business partner? Who are you doing the business with and so on and so forth? And you're like, Hey, I thought this was legal. And they're like, we know it is, but we still want to know who's who's in business with you. So like, okay, I hired Jane Doe and across the street. So she needed some money to support her for kids and whatnot. And they're like, okay, give us the information about Jane Doe. So we'll be seeing her at tax time. Right. But the idea, the idea here, of course, is that remember that the income tax system is based on when someone makes income. That is when the tax happens in every transaction typically has two sides to it. You've got someone that's paying for services and someone providing the services. So one person is receiving money for services provided income. That's where the IRS wants to catch it. And the other side is having an expense. In our case, we're a business. Anybody that were paying money to is something from our standpoint that could possibly be a deduction good for business, good for taxes at least lowering our taxable income. But to the person receiving it is income. And so where does the IRS have the leverage in order to track and make sure that everybody is reporting their income? They have it on the person paying. We're the business paying. Therefore, we have a tax benefit if we pay someone from the deduction. So the IRS is going to come after us to say, who are you doing business with? Who did you pay? Because the person receiving the money has the income and the IRS wants to go after them to make sure that they are reporting the income on their side. That's the general idea. If you keep that framework in mind, some of this stuff will make more theoretical kind of sense and be easier to learn. So if you make or receive payments in your business, you may have to report them to the IRS on information returns. The IRS compares the payments shown on the information returns with each person's income tax return to see if the payments were included in income. So you must give a copy of each information return you are required to file to the recipient or payer. So in addition to the forms described below, you may have to use other returns to report in certain kinds of payments or transactions. So for more details on information returns and when you have to file them, see the general instructions for certain information returns. So clearly, where are going to be some areas where you're most likely going to have to give information not only to the person that you paid, but also to the IRS? Well, employees for one. That's going to be the structure that the IRS kind of prefers an employer-employee relationship because then they have the most leverage on the person paying, noting that they've been able to force the employer not only to issue a W-2, basically ratting out the wages that were earned by the employee, not only to the employee but to the government. That's what they really care about. And they were able to actually force the withholdings to happen for both federal income taxes as well as the payroll taxes, social security, and Medicare. Now, if they're not an employee, then maybe they're still an independent contractor in which case you might not have to give them a W-2. You might give them a 1099. Now, you might ask, what if I don't do that? I'm still paying my taxes. I still did my schedule C. What if I don't give like a W-2 or I don't give you this 1099? Well, then the IRS is going to come after you, right? Then they're going to hit you with the sticks that we're trying to avoid, metaphorical sticks of penalty and interest. And when it comes to like payroll taxes and whatnot or willfully not reporting the information, it could be worse than just penalties and interest. They might have other kind of sticks. They could wield at you in those cases. Okay, so form 1099 miscellaneous then. So use form 1099 miscellaneous, miscellaneous information to report certain payments you make in your business. These payments include the following. So you've got rent payments of $600 or more other than rents paid to a real estate agent. Now notice when we think about the difference between a W-2 and a 1099, you might say, hey, as a sole proprietor, I would rather hire someone maybe as a contractor as opposed to a W-2 employee because if I hire them as a W-2 employee, then I have all this other liability and responsibility of withholding their wages and so on and so forth and reporting the W-2s and whatnot just from a bookkeeping and logistical standpoint being a very, you know, tedious task which is going to cost us money for sure. However, remember that you have to make sure that they qualify as a contractor versus an employee because if they don't, the IRS is going to tend towards them being an employee and if you're writing off a lot of money on like contractor expense because that's what it's going to look like on your Schedule C and expense for contractors and if the IRS says, hey, they're in a business where that looks like it would be W-2 employees, W-2 wages, then they could come after you and say, hey, look, you've miscategorized as a contractor. We think they're actually W-2. So you want to make sure that you have that distinguishment correct. And then if they are a contractor, then when you pay the contractor, you're going to want to expense the money. So meaning if it was rent expense, you're going to have it in rent expense. If it was other contractors, you're going to put it somewhere and like contractors expense it or something like that. The IRS is going to see that number, which will typically be significant and if you don't have any 1099s you provided to them to support that expense, that's when you can imagine they might kind of come after you and they're saying, hey, you've got so then you might try to bury the expense. What if I put it into miscellaneous expense or something or supplies? Well, that's going to look quite conspicuous because then you can have this huge expense amount in miscellaneous or something. So the point is that if you have a contractor, you have to issue the 1099s to support the expense that you have on the books. And if you don't, then you're not in compliance and the IRS could come after you with the sticks. Now, when do you have to issue a 1099? Usually you don't have to issue ones to people that are corporations because if they're incorporated, the IRS in theory already has their hooks in them. The IRS isn't really worried about Edison, the utility company not properly doing their taxes because they're so big and large that they're actually almost in business with the government. They're almost co-mingled. So they're going to be in compliance with the law without a problem generally. It's going to be the people, the little guys that the IRS is going to be worried about. So if you hire a contractor that's a sole proprietor, that's when it's likely you'll have to issue, say, the 1099, right? So if you had rent, it might be on miscellaneous prizes and awards of $600 or more that are not for services such as winnings on TV or radio shows. Now, remember the 1099 miscellaneous used to be the most common one, but they made a different 1099 now so that the miscellaneous is no longer the one that's probably the default one for normal contractor wages. So this is the miscellaneous. So royalty payments of $10 or more, payments to certain crew members by owners or operators of a fishing boat, amounts paid for the purchase of fish for resale from any person engaged in the business of catching fish. You got to keep those fish catchers in track, man. You also use the form 1099 miscellaneous to report your sale of $5,000 or more of consumer products to a person for resale anywhere other than in a permanent retail establishment. Okay, then we have the form 1099 NEC, most likely the most common 1099 form that small businesses, for example, and most businesses are required to deal with at the end of the year. So at the end of the year, you got to pull up all your tax information to do your taxes, which is the schedule C, the form 1040 and so on, if you're a small business, but also provide the information returns the 1099. So we've got the file form 1099 NEC. That's non employee compensation for each person in the course of your business to whom you have paid at least $600 during the year in services performed by someone who is not your employee. So if you're thinking, are they an employee or not, if they're not an employee and you're paying them for services, then most likely you're talking about a 1099 NEC. So that including parts, materials, etc. And then cash payments for fish or other aquatic life you purchase from anyone engaged in the trader business of catching fish or payments to an attorney. So you must also file form 1099 NEC for each person from whom you have withheld any federal income tax report and box for. Now, normally with the 1099, you don't have to withhold the federal income tax. That's the point of having the 1099 as opposed to the W2. But if the person that you're given the 1099 to, for example, doesn't give you the necessary information to rat them out to the IRS, like they don't give you the Social Security number or their EIN number, the IRS can't go after them. So then the IRS is going to say, well, we want you to withhold the money from them for us in that case because we can't properly go after them if they don't give us that information and it's your responsibility to get that information because we said so. So under the backup withholding. If you use 1099 NEC to report sales totaling $5,000 or more of consumer products, then you are required to file form 1099 NEC with the IRS by January 31st. Then we've got the good old form W2. So obviously if you have employees, remember how complicated this has gotten over the years because I think people kind of lose track of what things were like kind of before and how much. Because if there were no laws that are kind of governing these withholdings and whatnot with the payroll, the payroll would be as easy as paying the utility bill for a business. If you're a sole proprietor and you pay the utility bill, what do you do? You just write a check, decrease in the checking account and the other side goes to utilities expense. If you had an employee back in the day and you're just like shake hands and you're like, okay, I'm going to pay you so much at the end of the week based on what you do, then the transaction from a bookkeeping standpoint would be very easy. We would just simply say, okay, now I'm going to pay you what I agreed on and we're going to say cash goes down and we have payroll expense. But we can't do that these days, right? Because they have to qualify for an employee and we need to withhold the money and we have to deal with payroll taxes, not only federal income taxes, but social security and Medicare. And we have to make sure that we are in compliance with any kind of employee laws, of course, that might go beyond bookkeeping. And we have to file these information returns not only to the employees so they can self-report the income, but also to the government so the government has the information for them. In other words, the government can probably do our employee tax returns their form 1040 without them actually filing a return because we basically did it for them, right? We filed their return on there. So that's the form W-2. So you must file form W-2 to report payments to their employees such as wages, tips and other compensation and withhold income, social security and Medicare taxes. So if you file form W-2 online for more information about form W-2, see the general instructions for form W-2 and W-3. Now, like we saw with the 1099, the 1099 is going to support an expense number on your Schedule C, which is probably like contractor expense. So if the IRS comes after you, you're going to say, yeah, I deducted this huge number for contractor expenses because I bait a bunch of contractors, but I gave you the 1099s, so stop bugging me, go after them if you want that. And then the same with the W-2. With the W-2, you're typically going to have a huge expense on your Schedule C for wages expense. And obviously that's a huge indication that you had employees and the IRS is going to say, who are you in business with? Who are you working with? Who are you working with? And you're like, okay, here's the W-2. It's Mary Jane across the street with her four kids. And you go after her for crying. I give up. And then so you give them the W-2 form. And that means that the sum of the W-2 forms, the W-3 form, which represents all the W-2 combined together should tie out to what the expense is in essence on the Schedule C, right? Because you've given them those two documents that should kind of coincide. I got the deduction and I told you where to go to get the money with the W-2 on the income side of things. The law provides for following penalties if you do not file form 1099 Miscellaneous, form 1099 NEC, or forms W-2, or do not correctly report the information. So here's obviously the question. Well, what if I don't? What if I don't do it? I ain't ratting out Mary Jane. There are four kids over there. Well, for more information, see the general instructions for certain information returns. So failure to file information returns. This penalty applies if you do not file information returns by the due date due to include all required information or report incorrect information. Oh, really? So now if I don't rat out Mary Jane and her four kids, that's what's going to happen? Well, I mean, I guess it's really not that bad. Okay. Well, but still no failure to furnish correct payee statements. This penalty applies if you do not furnish a required statement to a payee by the required due date do not include all required information or report incorrect. Okay, I'll do it. I'll do it. It's Mary Jane and her four kids for crying out. Go, go after it. Just leave me alone. Waiver of penalties. These penalties will not apply if you can show that the failure was due to a reasonable cause and not willful neglect. So obviously when we get into the law, we get into this thing of what was it intentional, right? Was it intentional? If you intentionally broke the law, then it should be worse. That's why we got this willful neglect. So did you not file the 1099 because you didn't know you didn't know what you were doing? Or did you did you lie to us on purpose? Were you trying to were you withholding Mary Jane's information? And in addition, there is no penalty for failure to include all required information for more or for including incorrect information on a de minimis small number of information returns. If you correct the errors by August 1st of the year, the returns are due. So obviously if there is an error, if it's a small error, then you would think it would be less likely to cause a problem. But if you self correct it, you're more likely to have a lesser penalty than if, you know, the IRS comes after you and they force you to correct it. So the incentives are attempted to be set up so that you could so that so that you file the proper numbers. So a de minimis number of returns is the greater of 10 or one half of 1% of the total number of returns you are required to file for the year. Form 8300. You must file form 8300 report of cash payments over $10,000 received in a transfer or business. If you receive more than $10,000 in cash and one transactions or two or more related business transactions. So now we've got this limit of the $10,000, which used to be a lot of money. But then you've got the inflation hitting us these days. It's like with that $10,000, can we raise the limit a bit? That's not that's not what it used to be these days with all the inflation crushing. And anyways, the cash includes us and foreign corn and currency. It also includes certain monetary instruments such as cashiers and travelers checks and money orders. Cash does not include a check drawn on an individual's personal account personal check for more information. You can see publication 1544 reporting cash payments of over $10,000 penalties. There are civil and criminal penalties, including up to five years in prison for not filing form 8300 filing or causing the filing of a false or fraudulent return. Obviously, when you talk about those large dollar amounts, then they're skeptical that maybe there's fraud or something going on. And again, that used to make more sense when the dollar amount seemed quite high. But these days, it's not like out of the realm of business for a lot of businesses, you would think possibly. But anyway, going out of business checking. So the following checking highlights the typical final forms and schedules you may need to file if you ever go out of business. Now remember that setting up the business sometimes is actually easier than removing or stopping the business, especially if you have set up things like an EIN number and a separate legal entity rather than having a Schedule C like an S Corporation or an LLC or something. So just a quick reminder that if you are stopping business, you want to make sure that you do it properly so that you don't have the ghost of the business following you around and just ruining your life going forward. When you move on to a new step in your life, you would like to close the door on the last one so it doesn't keep dragging you back in, trying to suck you back in. And you're like, hey, I've stopped doing that business for good. So anyway, so if you are liable for income tax, then you may need to file Schedule C with your form 1040, 1040 SR for the year in which you go out of business. You might have to indicate on the Schedule C that this is the last year, for example. So file Form 4797 with your form 1040, 1040 SR for each year in which you sell or exchange property used in your business or in which the business use of certain Section 179 or listed property drops to 50% or less. In other words, if you bought equipment, depreciable assets, and you're stopping the business, you might be selling those assets, which means you're going to have to deal with the sale of depreciable assets and have to deal with the depreciation, which could include 179 calculations that you took when you bought those things. File Form 8594 with your form 1040 or 1040 SR if you sold your business. SE Tax, File Schedule SE with your form 1040 or 1040 SR for the year in which you go out of business. So sometimes people stop their business like in the middle of the year and then they just kind of like stop and there's like, I just won't do it. But you have to close it out because at the end of the year, you're still going to owe self-employment taxes on the portion of the business for the half of the year that you're still in business. And you certainly do not want to neglect the payroll taxes because that can really haunt you for some time into the future. So your old business like an old ex will come back and just suck you back in like crazy. So Employment Taxes, so File Form 941, that's the quarterly payroll taxes for Social Security and Medicare for payroll and federal income tax withholding for calendar quarter or Form 944 for the year in which you make final wage payments. Note, do not forget to check the box and enter the date final wages were paid online 17 of Form 941 or line 14 of Form 944. File Form 940, that's also a payroll tax return of course for the FUTA Federal Unemployment Tax for the calendar year in which the final wages are paid. Now if you didn't have any employees, meaning you just had yourself and you paid your payroll taxes in the form of self-employment taxes, no W-2s and whatnot, then it'll be easier to wrap that up. But if you do have employees, do not neglect that bit because that, again, causes problems. You stop in the middle of the year and you're like, ah, I'm just not going to do payroll taxes for the next two quarters because I stopped in the middle of the year. And I'm not going to do my year in W-2s and the W-3 and so on. Not a good idea because the IRS will actually come after you saying not only did you not file the forms but you also had withholdings and you didn't tell us what the withholdings were. And that could mean that you actually took money from your employees in the form of withholdings. If you didn't pay that to the government, they see that as not only not paying your taxes but also not paying the employees' taxes, basically stealing from the employees even though you were required to withhold it. So make sure to close out that payroll tax. So information return. So you've got to provide forms W-2 to your employees for the calendar year in which you make the final wage payments. So that's on you. Even if you start to stop the business in the middle of the year, make sure to send out those W-2s. Same with the W-3 and the W-2 forms with the IRS. Provide the 1099 forms, possibly not as crucial, but clearly if you don't do the 1099 forms, you're trying to close this business up. And the IRS will still be coming after you and say you didn't rat people out with the 1099s properly. You ain't closing yet. We're going to hit you one more time before you close. File form 1096 to file forms 1099 miscellaneous and the 1099 NEC.