Tax Lounge

The faster the tax world is turning, the more it pays off to relax. This is especially true in an ambience where you can read, think and discuss with our tax consultants. Take a seat in the Tax Lounge and read the articles to gain more knowledge about the variety of tax issues you face on the daily basis.

What is Self-Employment(SE) Tax? & Strategies to Reduce the SE Tax

The Self-Employment Tax is how an independent contractor pays Social Security and Medicare payroll taxes. In the case of employees, the employer and employee split the cost of these payroll taxes, each paying 7.65% of eligible wages. An independent contractor, by contrast, is both the employer and the employee, so a self-employed person pays both halves, or 15.3% total.

If your net earnings from self-employment equal $400 or more, you must do both of these:

  • File Schedule SE
  • Pay self-employment tax

In this way, you obtain Social Security and Medicare coverage through the payment of self-employment tax.

For 2014, the self-employment tax rate is normally 15.3%. The rate is made up of both of these:

  • 12.4% Social Security tax
  • 2.9% Medicare tax

For 2014, the maximum amount subject to Social Security tax is $118,500. However, all self-employment income in excess of $400 is subject to Medicare tax.

To figure net earnings from self-employment, multiply our net business profit by 92.35%. You use this percentage since an employee is only required to pay one of these:

  • 1/2 of Social Security and Medicare taxes
  • 7.65% of wage income

A self-employed individual must pay “both halves,” or 15.3%. So, the law equalizes the tax burden by reducing the income subject to tax by 7.65%. Here’s the formula:

  • 100% – 7.65% = 92.35%

You can deduct the employer portion of your self-employment tax as an adjustment to income on Form 1040. The amount you can deduct is usually 1/2 of the employer portion. This reduction in the base amount subject to the self-employment tax, along with the above-the-line deduction for the employer-portion of the self-employment tax, helps equalize the tax treatment between self-employed persons and employees.

Strategies to Reduce the Self-Employment Tax

The self-employment tax is basically a percentage of your net income from self-employment activities. The only way to reduce your self-employment tax is to increase your business-related expenses, as this will reduce your net income, and correspondingly reduce your self-employment tax. Regular deductions, such as the standard deduction or itemized deductions, won’t reduce your self-employment tax.

Similarly, above-the-line deductions for health insurance, SEP-IRA contributions, or solo 401(k) contributions will not reduce your self-employment tax either; those deductions only reduce the federal income tax. One tactic to examine when preparing your tax return: the impact of taking the Section 179 deduction or bonus depreciation for fixed assets. This will impact both the income tax and the self-employment tax.

Who Can Deduct Moving Expenses

You can deduct your moving expenses if you meet all three of the following requirements.

  • Your move is closely related to the start of work.
  • You meet the distance test.
  • You meet the time test.
Move Related to Start of Work
  • Your move must be closely related, both in time and in place, to the start of work at your new job location.
  • Closely related in time. In most cases, you can consider moving expenses incurred within 1 year from the date you first reported to work at the new location as closely related in time to the start of work. It is not necessary that you arrange to work before moving to a new location, as long as you actually go to work in that location.
    • If you do not move within 1 year of the date you begin work, you cannot deduct the expenses unless you can show that circumstances existed that prevented the move within that time.
  • Closely-related-in-place test. The distance between your new home and your new job can’t be more than the distance from the former home to the new job. If you don’t meet this test, you might still be able to deduct moving expenses if you can show one of these:
    • You’re required to live at the new home as a condition of employment.
    • You’ll spend less time or money commuting from the new home to the new job location.
Distance test

The move must be related to the start of a new job in a different
location. The location of your new job must be at least 50 miles farther than your former job was from your former home.

  • Ex: If your old job was 15 miles from your former home, then your new job must be at least 65 miles from your former home to pass the distance test.
Time test

If you’re an employee, you must work:

  • Full-time
  • At least 39 weeks during the first 12 months after you arrive in the area of your new job location

To pass this test, you don’t have to work at the same job for the entire time. You only have to work in the new area for the required time.

If you’re self-employed, you must work full-time for:

  • At least 39 weeks of the first 12 months
  • A total of at least 78 weeks of the first 24 months after your move

The time test is usually waived in these situations:

    • Disability
    • Layoffs not due to willful misconduct
    • Death
    • Military commitments
    • Transfers for the benefit of your employer

You can deduct moving expenses in the year you move. You might not have met the time test when you file your return. Even so, you can still deduct your moving expenses if you reasonably expect to meet the time test in the future.

However, if you end up failing the time test and you’ve already deducted these expenses, you
must do one of these:

      • File an amended return for the year you claimed the expenses
      • Report your moving expenses as other income for the year when you determined you can’t meet the test
Deductible expenses

You can deduct these moving expenses:

        • Amount you paid to pack and store your household goods and personal items
        • Amount it costs to travel from your old home to your new home. This includes mover’s costs, transportation, and lodging along the way. However, you can’t claim the cost of meals during the move.

If you use your own vehicle during the move, you can deduct one of these:

        • Mileage traveled
        • Out-of-pocket expenses you incurred during the move, like:
          • Gasoline
          • Oil

The mileage rate for 2014 is 23.5 cents per mile.

You can add parking fees and tolls to either the time or distance test.

You can’t claim either of these:

        • Expenses your employer reimburses you for:
        • House-hunting expenses
Widow(er)

Your filing status determines your income tax rate and standard deduction. If you’re a recent widow(er), file your taxes under the filing status that saves you the most money.

Filing married filing jointly

You can still file married filing jointly with your deceased spouse for the year of death — unless you remarry during that year. It’s your responsibility to file a final return for your deceased spouse.

Remarriage

If you remarry in the year of your spouse’s death, you can’t file as married filing jointly with your deceased spouse. However, you can file as married filing jointly with your new spouse. You and your new spouse can also each file as married filing separately. If a return is required for your deceased spouse, use the married filing separately status.

If you’re a surviving spouse with no gross income, you can be claimed as an exemption on both of these:

  • Your deceased spouse’s separate return
  • Your new spouse’s separate return

If you file as married filing jointly with your new spouse, you can claim an exemption only on that joint return.

Qualifying widow(er)

If you qualify, you can use this filing status for the two tax years after the death of your spouse.However, you can’t use it for the year of death.

To qualify, you must meet these requirements:

  • You qualified for married filing jointly with your spouse for the year he or she died. (It doesn’t matter if you actually filed as married filing jointly.)
  • You didn’t remarry before the close of the tax year.
  • You have a child, stepchild, or adopted child you claim as your dependent. This doesn’t
    apply to a foster child.
  • You paid more than half the cost of maintaining your home. This must be the main home of your dependent child for the entire year, except for temporary absences.

If you file as a qualifying widow(er), you can’t claim an exemption for your deceased spouse. However, you can use the married filing jointly tax table or tax rate schedule. The qualifying widow(er) standard deduction is the same as married filing jointly.

Filing as single

Unless you qualify for something else, you’ll usually file as single after your spouse dies. You might not qualify as a qualifying widow(er) if your child is a foster child. In that case, you’ll be able to use head of household status.

If you’d like to learn more, see these tax tips:

  • Death of a Family Member
  • Gift Tax
IRS Consolidates Late S Corp Elections

The IRS consolidated the provisions of a number of previous revenue procedures for requesting relief for late Selections under Sec. 1362, late qualified subchapter S trust (QSST) elections, late electing small business trust (ESBT) elections, late qualified subchapter S subsidiary (QSub) elections, and late corporate classification elections (Rev. Proc. 2013-30). The new procedure is now the exclusive simplified method for taxpayers to apply for relief for these late elections.

In general, the revenue procedure expands the time for requesting relief for these late elections to 3 years and 75 days after the date the election was intended to be effective. However, for a simple late S election request, if certain requirements are met, there is no deadline for requesting relief. Taxpayers that do not qualify for this simplified relief must submit a request for a letter ruling and pay a user fee.

General Relief Rules for S Corporation Elections

The following requirements must be met in order to qualify for late S corporation election relief:

  • The entity intended to be classified as an S corporation, is an eligible entity, and failed to qualify as an S corporation solely because the election was not timely;
  • The entity has reasonable cause for its failure to make the election timely;
  • The entity and all shareholders reported their income consistent with an S corporation election in effect for the year the election should have been made and all subsequent years; and
  • Less than 3 years and 75 days have passed since the effective date of the election (See the Exception to the 3 Years and 75 Day Rule section below).

If the entity qualifies and files timely in accordance with Rev. Proc. 2013-30, the IRS Campus can grant late election relief. If the entity does not qualify under the provisions of the Revenue Procedure, its only recourse is to request a private letter ruling.

Exception to the 3 Years and 75 Days Rule

Certain entities can qualify for the exception to the 3 years and 75 day rule when:

  • The entity is a corporation (i.e., not an LLC seeking an entity classification election);
  • The entity failed to qualify as an S corporation solely because the election was not timely field;
  • The corporation and all its shareholders reported their income consistent with S corporation status for the year the S election should have been made and for every subsequent taxable year (if any);
  • At least 6 months has elapsed since the date on which the corporation filed its tax return for the first year the corporation intended to be an S corporation;
  • Neither the corporation nor any of its shareholders was notified by the IRS of any problems regarding the S corporation status within 6 months of the date on which the Form 1120S for the first year was timely filed; and
  • The completed Election form includes the statements as described in the revenue procedure.

Although this exception exists, it is unlikely many situations will qualify since the current system is set up to notify the corporation of the problem with its filing requirement when the return rejects in processing. It could apply to a case where it did not go through normal processing.

DISCLAIMER

Tax Lounge is an informational source for industry news and related topics. We take every effort to provide honest and accurate tax information, but this information should not be a substitute for professional tax advice.

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