 Income tax 2022-2023, information returns. Let's do some wealth preservation with some tax preparation. Most of this information comes from the tax guide for small business for individuals who use Schedule C, Publication 334, tax year 2022. You can find on the IRS website, irs.gov, irs.gov. Looking at the income tax formula we're focused on line one income. Remember in the first half of the income tax formula is an essence in income statement, but just an outline, just a scaffolding, other forms and schedules flowing into these line items. For example, the Schedule C, the small business form, in essence an income statement in and of itself with income minus expenses or business expenses and the net income flowing into here, line one on the income tax formula. First page of the form 1040, we're focused on line number eight, Schedule C would then flow into the Schedule One, which would flow into here, the first page of the form 1040. Here is a Schedule C profit or loss from business where we could see the income and expenses in essence and income statement, income. Support accounting instruction by clicking the link below, giving you a free month membership to all of the content on our website, broken out by category, further broken out by course, each course then organized in a logical, reasonable fashion, making it much more easy to find what you need than can be done on a YouTube page. We also include added resources, such as Excel practice problems, PDF files and more like QuickBooks backup files when applicable. So once again, click the link below for a free month membership to our website and all the content on it. Minus expenses, information returns. What are they? How do we deal with them? If you make or receive payments in your business, you may have to report them to the IRS on information. Information. And returns. To understand them, let's first take a step back, think about the tax system. We have an income tax system. Income then is bad for taxes. Obviously income is good in general, but if we have to report the income, it's gonna increase our tax bill generally. The IRS has an incentive to try to verify the income that we are reporting to make sure that we're paying the proper amount of taxes. When you look at normal financial transactions, there's usually gonna be someone providing goods and services, someone's paying for the goods and services. The person providing the goods and services is gonna be receiving money generally, cash for the goods and services that they are providing, having income, which is good for them, but it's also a taxable possible event if they're most likely gonna have to report that income. The one that's paying for the goods and services may get a deduction possibly if they're a business and not an end user, meaning if you're paying for like a haircut, then you don't get a deduction for your haircut generally, unless you're a politician or something, maybe you get a deduction for your haircut, I don't know. But if you're a business that's paying for goods and services to another business or contractor, then you might get a deduction for it, which means that would be a tax benefit. So it's a bad thing because you have to have money going out, you're paying for goods and services, but it might be good for taxes because you get a deduction. The IRS has leverage on the payer in the transaction because they're the one that wants to get the deduction. So that means they're gonna be able to say, if you want the deduction, we want you to report the income to us on who you are paying. This is most clear in an employee-employer situation, which is why generally, if you think about the tone of what the IRS is saying, they usually want businesses structured in an employee-employer situation so they can have the most control over the employer to not only report the income that they're paying to the employees, but do the withholdings on the government's behalf. But if you don't have an employee-employer situation, then they still possibly might want information on who you paid, such as processing the 1099 forms. So that's another format where they're saying, we're not gonna make you do withholdings, but we want you to tell us who you gave the money to, and if you don't, we'll penalize you. And again, they have the leverage on the person that is paying so that the recipient of the money, they can double check and make sure that they're reporting their taxes. So that's the general structure. You always kinda wanna keep that framework in mind. The IRS used to have a system more of an audit type of system, kinda like if you were on a freeway and police officers are pulling people over for speeding. They're not gonna catch you every time you're speeding, but if they do catch you, then they're gonna have a ticket that's high enough that it's gonna prevent you from speeding. Audits used to be similar. They used to basically random audits used to be the primary tool that they would have, and if they audited you and catch you, then cheating, then they would have penalties on it. But now more and more, they're becoming more intrusive, meaning they want to get the information beforehand, and they can do that by getting, inserting themselves within the financial transaction requiring where they have leverage, which is on the payer side of things, to report more and more on who they're paying the money to. So that's generally what we have here. So the IRS compares payments showing on the information returns, which each person's income tax return to see if the payments were included in income. So you must give a copy of information return. You are required to file to the recipient or payer. In addition, the forms described below, you may have to use other returns to report certain kinds of payments or transactions. So notice when you think about 1099 forms and W2 forms for that matter, we think about them as something we have to give to the person that did the work, kind of to help them generate their tax return. And again, that's usually the perspective that's gonna be the angle that will be given when you're like researching this from the government, of course, as well. But obviously what they really want is for you to give that information to the government, so that they have the 1099, so they can double check that the person is reporting that income on their taxes. So for more details on information returns and when you have to file them, you can see the general instructions for certain information returns. You can find that on the IRS website. So we got the form 1099 miscellaneous. So this used to be the standard form for contractors and then they put another one out there for the contractors, but this one's still a common use form. So use form 1099 MISC miscellaneous information to report certain payments you make in your business. These payments include the following items. So rent payments of $600 or more other than rents paid to real estate agents. Then we've got prizes and awards of $600 or more that are not for services, such as winning a TV or radio shows, royalty payments of $10 or more. It's pretty low threshold. Payments to certain crew members by owners of operators of fishing boats. Amounts paid for the purchase of fish for resale from any person engaged in the business of catching fish. So apparently I don't know much about the fishing industry, but there's some special rules oftentimes with regards to fishing related practices for some reason. So you also use form 1099 miscellaneous to report your sales of $5,000 or more of consumer products to a person for resale anywhere other than in a permanent retail establishment. Then we've got the form 1099 NEC. This is probably the most common 1099 that most small businesses may be required to report information returns. Remember, we're not talking here about receiving the 1099. You might receive these 1099s as well. That means that someone else is reporting them to you. And let's just kind of recap the structure of this, when would this happen? If you're receiving a 1099, that's because you're in a small business most likely where you did work for other businesses, right? You did work for another business as a contractor. You are not a business, you're not a corporation yourself. You're not like an S corporation or you're not incorporated. Therefore they were required to give you a 1099. And when you record your income, your income you would think would have to be equivalent or greater than the amount of the 1099s you received. Otherwise you would think the IRS would question your situation. That would be the general side on the receiving of the 1099s. Now if you do business and you don't do business and your customers are not another company, but you're like a hair salon or you're a restaurant or you're a massage parlor or something like that where you're doing business for the end customers, not another business, then it's likely you're not gonna receive the form 1099s from the customer because the IRS no longer has leverage over the payers because people that are getting their haircuts or buying a drink or something like that aren't required to give a 1099 to the bartender or to the person that owns the chair that has their own business or their massage table, right? So you're not gonna get a 1099 in that case. It doesn't mean you don't have to report the income but it just means that you're not gonna have a 1099 and the IRS has less control over those industries which is why I don't think they don't like those industries but they would like to have more control over those industries which is why they tried to shut them all down during COVID. I think I don't know, I'm just kidding. But in any case, so then on the other side of things if you hire someone as a small business then you have the benefit of being able to deduct the contractor expenses. So you have to determine who did you pay? Now if you paid like the phone company like a big corporation or the utility company then the IRS isn't concerned with you issuing a 1099 for Edison, giant Edison phone company. They have their own, they've got their hooks into Edison already. They don't need you telling them that you paid Edison you know, $30 some dollar like $100. But if you're paying another contractor that isn't incorporated then the IRS doesn't have their hooks into them as much and they want you to report anything over like $600 to make sure that other contractor is paying their fair share of the income tax. So that's how it generally is gonna work here. All right, so file form 1099 NEC, non-employee compensation for each person in the course of your business to whom you have paid at least $600 during the year in service performed by someone who is not your employee including parts and materials. So notice if they're your employee then you're still gonna be reporting on them. You're just gonna use the W2 form. Not only are you gonna be reporting on them but you're required to withhold from them. And that opens up the other issue of if you're hiring someone as a small business do you want to hire them as an employee? Do you want to hire them as a contractor? Do you want to take them on as some kind of equity partner taking a piece of the profit sharing? So the questions would be if they're an employee you have less control. I mean, you have more control over them in that situation but you have to deal with the W2 and the withholdings and all that kind of stuff. If they're a contractor then you still have to issue them the 1099 but you don't have to deal with all the other kind of payroll stuff although you have less control over them in that situation they're more likely to leave possibly or whatever comes up comes up. And then if you hire them as a partner or you take on a partner and give them an equity interest you need to be careful on that because that could push you from reporting on the schedule C to having a partnership business and obviously their decision making in the partnership is something you might be liable for within the partnership. So you want to be very careful of that because a lot of small businesses you have one visionary that is kind of knows what to do within the business and it actually works well from in a non-democratic system, right? With a little small business often has like one person that knows the direction that they want to go in and when you turn that into a committee with a bunch of people that have different directions it becomes a problem. That doesn't mean that as things grow things obviously change and the structure of the whole organization has to change because the specialties will change and whatnot but you want to be careful when you're thinking about taking on a partner because you might have different ideas about what's going on with the partnership. Also you got to be careful in terms of can someone qualify as a contractor or an employee? If you classify someone as a contractor then the government's going to try to get them as an employee because remember the government wants you to be their tax collector. So you want to make sure that if they're a contractor they definitely qualify as a contractor even if you were to be audited and questioned about that. Okay, so cash payments for fish or other aquatic life and purchase from anyone engaged in the trade or business of catching fish. So we've got that fish thing again going on here. Special rules for fishermen. You got to know your taxes, Fisher people because there's a lot of special rules for you guys. Payments to an attorney. Okay, so you must also file form 1099 NEC for each person from whom you have withheld any federal income tax reported on box four under the backup withholding rules regardless of the amount of the payment. So in other words, if they're an employee you have to be the tax collector. The government's going to force you to make you be their tax collector. You withhold the money, you pay it to them for your employees. But if you have a contractor typically the government's not going to force you to be their tax collector but they still want you to rat out who you paid the money to with the form 1099 giving the IRS the social security number amount you paid them and their address. So they can go collect on their own. But if you can't give them that information like you can't get the social security number you can't get their address to their proper name or something like that then the IRS wants you to withhold. They want you to withhold the money because you're not ratting out the person that you paid properly and so they want you to make sure that you're the one that's withholding the money as if they're kind of like an employee so that they get paid that way. So caution, if you use form 1099 NEC to report sales totally in $5,000 or more of consumer products then you are required to file form 1099 NEC with the IRS by January 31st form W-2. You must file form W-2 to report payments to your employees such as wages tips and other compensation and withhold income social security and Medicare taxes. So the W-2 is probably the most common form that we know of but it's still quite complicated. Remember that there's a big difference between doing an employee situation having to withhold money, process payroll taxes deal with the 941s, the 940 issue in the W-2 and the W-3 and then just giving someone a 1099 form. It's a lot easier to give someone a 1099 form but so keep that in mind. Doesn't mean you don't wanna have employees. Just note there's a big difference. There's pros and cons to both of those formats. So you can file form W-2 online for more information about form W-2. See the general instructions for form W-2 and W-3. Just wanna note when you're dealing with payroll, if you're thinking about taking on payroll, it's a mess and it's not the easiest thing to do. So you wanna generally think about how you're gonna do that well first, meaning do you wanna process the payroll through your tax software? Do you wanna hire a third party payroll provider to help you process payroll? And I would first talk to someone that is not related to the person you're gonna be paying for payroll such as a CPA firm or something, asking them what's my best options to deal with payroll and then set it up properly the first time because problems with payroll is the most likely area that small businesses get sued on and stuff like that. So you wanna make sure that it's set up properly from the get go if possible which a lot of small businesses get hung up on. Okay, so penalties. The law provides for the following penalties if you do not file forms 1099 miscellaneous, forms 1099 NEC or forms W2. So obviously the question here as always is what if I don't, what if I don't do that? Well then they hit you with the sticks of penalties and interest, right? We're trying to avoid the sticks here. This isn't, it's not like we're doing this just because, right? It's not helpful to the business to have to do these things. They're forced to do these things. And why? Because we're trying to avoid getting hit with sticks. So, or do not correctly report the information. So for more information, you can 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, do not include all required information or report incorrect information. Now note, you might be asking, well, how would they know if I don't do an information return, right? But clearly, if you have a W-2, I mean, if you have like your form schedule, your schedule C, on your schedule C, you want to deduct, because these are gonna be huge deductions, what you paid either an employee or a contractor. How are you going to do that? Well, if they're an employee, you would probably call it wages or payroll. Now, if you put something on your schedule C that you deducted like 50,000 of payroll expenses and you don't report W-2 forms, you see there's a problem. That's why the IRS has a leverage. The IRS can see that you want to deduct the payroll. If you want to deduct the payroll, you have to process the payroll and be their tax collector and issue forms W-2. If you have a contractor situation, same thing, you might have paid $50,000 in contractor fees. Where are you gonna deduct that? You're gonna deduct it as contractor fees or something like that. And then if the IRS sees you've got 50,000 in contractor fees but you didn't process any 1099 forms, they're probably gonna be like or they could quite likely ask, how that's why the IRS has the leverage, right? Because they're gonna see the deductions and therefore they have the leverage, do you want those deductions? They have the leverage to make you into their tax collector or at least a rat. Rat, not who you paid. Any case, failure to furnish correct payee statements. So this penalty applies if you do not furnish a required statement to a payee by their required date, do not include all required information or report incorrect information. So then you got the waiver of penalties. No penalties. So these penalties will not apply if you can show that the failure was due to reasonable cause and not willful neglect. This is often the case in law where the question is intent, which is a very difficult thing to determine. But if it was just neglect, I didn't do it. I didn't know. Then you're gonna have less of a penalty oftentimes than if they say if it was intentional and so on. So in addition, there is no penalty for failure to include all required information or for including incorrect information on a de minimis small number for information returns. If you correct the error by August 1st of the year, the returns are due. So meaning a de minimis amount, you were off, you made an error, but it wasn't that big of an error. It's not material in comparison to the total dollar amounts as they determine it and you fix it. 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. So that's a pretty small number. So form 8300. You must file form 8300 report of cash payments over $10,000 received in a trade or business if you receive more than $10,000 in cash in one transaction or two or more related business transactions, cash includes US and foreign coin and currency. So it also includes certain monetary instruments such as cash years and traveler's checks and money orders. So 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 over 10,000. So you can see what the IRS is trying to do. They're trying to monitor transactions of a certain size now, right? And as things become more electronic, you could see what they're gonna try to basically insert themselves into these electronic transactions and they'll be able to kind of regulate more, you would think once that happens, unless people start using things like cryptocurrency or something that don't have the same regulations with it, I don't know. So penalties, there are civil and criminal penalties including up to five years in prison for not filing form 8300, filing or causing a filing of a false or fraudulent form 8300 or structuring a transaction to evade reporting requirements. Okay, so here's a going out of business checklist. So notice that when you start a business it's actually easier sometimes to get the business up and running than kind of taking the business back down or taking it apart because now if you've got an EIN number and you're reporting 1099 forms and if you go as far as structuring a separate type of entity like an S corporation or an LLC those can be quite difficult to like, to deconstruct, not totally difficult but sometimes there's a state in the federal component and sometimes it's a little bit of a problem to get them deconstructed. You wanna make sure that you close them properly or else you can end up with issues and fees in the future and it's kind of a pain. So note the following checklist highlights the typical final forms and schedules you may need to file if you ever go out of business for more information see the instructions for listed forms. So you got the income tax. So if you are liable for income tax then you may need to file schedule C with your form 1040 or 1040 SR for the year in which you go out of business and then file form 479 says them for with your form 1040 or 1040 SR for each year in which you sell or exchange property used in your business. So you sold, you know, business property like depreciable property or something or in which the business use of certain section 179 or listed property file form 8594 with your form 1040 or 1040 SR if you sold your business. You got this SE tax, self-employment file schedule SE with your form 1040 or 1040 SR for the year in which you go out of business employment taxes. This would only be the case if you had employees, not contractors file form 941 for the calendar quarter in which you make final wage payments. Oftentimes when people go out of business they kind of, they try to cut it off in the middle of the year like you went out of business in the middle of the year and you just drop finishing up the payroll taxes. Right? Cause you didn't, you didn't do payroll for the last couple of quarters of the year but you still need to file the W2s and make sure you've done the 941s you need to in the 940. Otherwise payroll is a problem. You don't want to mess up payroll because the IRS is more crazy about payroll than most other things in part because like if you withheld money from your employees as withholding taxes that you're supposed to pay to the government like social security, Medicare and federal income tax and you don't then not only did you not pay your own taxes you basically took money from your employees and then didn't pay the taxes, right? So it's actually a bigger problem kind of because it's kind of like you're stole from the employees even though you were forced to withhold the money from the employees. So do not forget to check the box and enter that the date final wages were paid then you got the form 940 that's another payroll form for the calendar quarter year in which final wages were paid and then you got the information returns provide W2s to your employees for the calendar year. So even if you stop in the middle of the year you want to make sure you issue the W2s close the business up as best you can try to end it wherever it's ended so that you can move on and the business doesn't kind of try to take you down for the next thing you're trying to do. I'm trying to move to the next thing here and the dang business keeps coming back like a zombie and trying to cut me down I'll tell you what, anyways, don't let it do that. So file form W3s and file form W2 provide forms 1099 miscellaneous and form 1099 NEC to each person to whom you have paid at least $600 and then file form 1096 to file forms 1099 miscellaneous. So that's the closing worksheet. If you have an S corporation that you set up or an LLC you want to make sure that you close those and that might take on the state as well on making sure you close everything properly not just on the federal side but on the state side.