Think the previous article about backup withholdings sounds like an unfair penalty? Well, if you’re concerned about your interest income that might be subject to it, you’re in luck. The IRS has made it so backup withholdings can only happen in very specific circumstances.
Back off the backup withholdings
The IRS maintains the Taxpayer Identification Number (TIN) Matching Program in an effort to reduce backup withholdings and the penalties that follow. TIN Matching Program allows third party payors to be able to match and verify TIN information. Payors, such as brokerages, consult the IRS TIN Matching Program when handling a client’s tax information to prevent backup withholding penalties from the IRS. The TIN Matching Program has been around since 1997. Just like many other programs through the IRS, it is also now available online.
TIN Matching database
“Authorized payers and authorized agents”, such as brokerages, who have filed 1099 forms with the IRS in the past two years can use the TIN Matching program. To participate, interested authorized payers register online to use the IRS’s e-services. Currently, there are no fees involved in using the IRS’s TIN Matching services. It is accessible 24/7 aside from any scheduled downtime maintenance.
Once the user has registered and set up their account, they can log into the TIN Matching Program and begin entering TIN numbers to match into the IRS’s database of TINs. Users can enter up to 25 different TINs each session at a time. Once the information has been submitted, the results will come back with “Match Indicator” noted specifying which TINs match up with the IRS’s records. This process is known as “Interactive TIN Matching”.
For those that may need to match up much larger amounts of data, the TIN Matching Program also has a “Bulk TIN Matching” system where you can upload a simple text file of a document with the TIN type, TIN, name, and an optional account number field in the following format:
TIN TYPE; TIN; NAME; ACCOUNT NUMBER
TIN TYPE; TIN; NAME; ACCOUNT NUMBER
TIN TYPE; TIN; NAME; ACCOUNT NUMBER
The program will then match the data with its records and send back a text file document with the results of “match indicator” noted next to each item of data.
The TIN Matching Program is a useful resource for payers and interested parties. If you found this article informative and useful, follow us on our social media pages for future articles about tax resources. MiklosCPA is a Los Angeles-area accounting firm that supports businesses with their tax services and back-room accounting services to our client’s specifications and requests. If you want to learn more about our services, please contact us!
If you read the previous article about backup withholding, some of this will sound familiar. Put simply, backup withholding imposes an additional withholding tax on recipients of certain types of passive income. Under-reporting income or inaccurate information on tax filings trigger this additional tax. Recipients bear the brunt of it, but how do payers like other financial firms handle backup withholdings? Let’s take an example:
Dak Wilson has stock investments managed by Orange County-based Third Foundation. Dak annually earns income from dividends of those investments, which Third Foundation pays to him. Dak originally submitted tax forms to Third Foundation with an SSN typo that was overlooked. The IRS attempted to contact Dak by mail 4 times to amend the error. After the 4th notice, the IRS additionally notified Third Foundation that Dak Wilson is now subject to a backup withholding due to his incorrect SSN information. Third Foundation must start applying the backup withholding (a flat 28% as of 2016) on Dak’s investment income until they are notified by the IRS to cease the additional withholding.
The backup withholding occurred through the incorrect information provided by Dak Wilson (the payee) to Third Foundation (his payer) for the dividends to be payed to him. Third Foundation must also notify Dak that a backup withholding was made within 15 days of the first payment that was subject to it. Publication 1281 goes into greater detail regarding the processing of backup withholding to the IRS.
Backup withholding is an unpleasant circumstance to fall into. As a payee, it’s additional income out of your pocket. Payers must also process the additional paperwork. Having a knowledgeable support team, like our team at MiklosCPA, can help avoid or rectify these kinds of issues. We are a California-based accounting firm with depth of knowledge and experience in supporting small businesses through their accounting and taxation needs. If you would like to learn more about our services, please do not hesitate to reach out!
Do you have passive income like stock or rental income? Improperly providing information to payers, such as banks, can cause a backup withholding on your passive income. Certain types of income on your Form 1099 may be subject to the backup withholding. Currently, the rate is set at 28% for certain income payments made. However, you can avoid this withholding by providing correct and accurate information.
Income subject to Backup Withholding
Interest income
Dividends
Patronage Dividends
Rents, Profits, and Other income (as in the “other income” line noted on a person’s Form 1040)
Independent contractor commissions, fees, and related income
Brokers and barter transactions
Fishing boat operators payments
Payment card and third party network transactions
Royalty payments
Prevent Backup Withholding
Provide correct tax identification (TIN) numbers such as your Social Security Number or Employer Identification Number (EIN). Incomplete or incorrect numbers will trigger a backup withholding.
Do not under-report interests or dividend income on your tax return. After a 120-day period and notifying you of the under-reporting by mail, the IRS informs your payer that you have been under-reporting dividend or interest income. The payer will then start the backup withholding.
Backup withholding is an not widely known issue that can take away what you earn from investment or other types of passive income. To prevent such penalties from the IRS requires a knowledgeable source of advising. MiklosCPA can certainly assist you with that and other accounting needs. MiklosCPA is a tax advisory and accounting firm that utilizes its experience and knowledge of tax to help businesses take care of their taxation and accounting needs. Businesses can then focus on what needs to be done, which is to succeed and grow. If you are interested in learning more about our services, feel free to contact us.
Employers use Form 8027 to report the amount of money received as tip income by employees or any allocations of tips. Just like other filings the IRS has been migrating online, filing Form 8027 has also become possible electronically.
For the most part, information needed to be noted on Form 8027 corresponds to the electronic filing. In the case of Form 8027, you will need to use the IRS’s FILING INFORMATION RETURNS ELECTRONICALLY (FIRE) service. Unlike other commonly offered e-file options, FIRE is used for specific types of informational reporting on certain forms, like Form 1099.
The due date of filing Form 8027 is the last day of February of the following year. If you file it electronically through FIRE, the due date is instead moved back almost a month to March 31. Definitely another incentive from the IRS to get everyone to start filing their taxes electronically! In the event that you may need an extension, you will be required, as of the 2016 tax year, to submit a paper Form 8809 though.
To file through FIRE, you have to apply to use it with Form 4419. It can be completed online. Once processed and approved, your company will receive a Transmitter Control Code (TCC) so that you can transmit informational filings such as Form 8027.
Sometimes the amount of filings and where they can go can get overwhelming for a small business. Having a supportive team like MiklosCPA to take care of the accounting and taxes can ease that burden. We are a California-based firm that has helped many small to mid-sized businesses with their accounting and tax needs. If you are interested in learning more about our services, please do not hesitate to reach out to us.
We also regularly post tax tips and other “good to know” tax articles on our website for our visitors and interested readers. Follow us on our social media pages for future updates!
W-2 forms provide information to individuals about how much an employer paid them, how much withheld for taxes, and other information. Individuals use the information from W-2s to file their taxes properly. W-3 forms report the same information, but those forms are forwarded to the Social Security Administration. The W-2 goes to the IRS (with a copy sent to employees too). The IRS also requires employers deliver copies of W-2 forms to their employees no later than January 31st of the following tax year.
As the government slowly moves its filing operations online, employers can now electronically file (e-file) W-2 and W-3 forms through their website. Employers with 250 or more W-2 forms to issue are required to file electronically. Those with less than 250 W-2s to file are not required and may opt to use paper.
Substitute W-2 Forms
The IRS laid out very specific guidelines in Publication 1141 about the layout and printing for substitute W-2 forms. Some of the guidelines are common sense such as printing on 8.5″ x 11″ paper and using nonreflective black ink. Other more specific guidlines include using 18-point Arial font for form numbers on a W-2 form. Original W-2 forms are filed with the SSA, while legible photocopies can be provided to employees.
Nowadays with accounting software able to generate proper W-2 forms, printing out proper forms is not much of an issue. Having the right information never goes out of style though. Making sure your employees have the right income tax withholding while factoring benefits may be overwhelming for an employer trying to run a business.
We here at MiklosCPA can help your business out with that! We are a California-based accounting and tax advisory firm that has helped many businesses with their accounting and tax needs. Freeing up time that would be spent on overseeing accounting, business owners can instead focus their energies on growing their firm. We use a mix of innovative online software services and personalized communications to meet your needs and goals. If you are interested in learning more, please reach out to us!
Some of the most popular types of retirement plans offered to employees are small business 401k plans. These plans often have high contribution limits and both employers and employees can contribute to the plans. There are also tax incentives for employers by establishing and maintaining 401k plans for their employees. Compared to Simplified Employee Pensions (SEPs) and Savings Incentive Match Plans for Employees (SIMPLE) plans, 401ks require a bit more paperwork to establish and maintain.
Establishing a 401k Plan
As a small business, one of your first decisions in establishing a small business 401k is deciding whether to set up the plan yourself or consult with a professional financial institution. Large firms such as Charles Schwab and Fidelity offer 401k plans to set up and maintain on behalf of a business. Whether you decide to set one up yourself or have an outside financial firm assist you, there are 4 major steps in establishing a 401k:
Adopt a Written Plan Document – This establishes the foundation for day to day operations of the plan and what type of 401k plan your business will use: a traditional 401k, a safe harbor 401k, or an automatic 401k plan. Put simply, traditional small business 401ks offer the most flexibility in contributions and vesting schedules (as in, the amount of money an employee is entitled to in a 401k plan after a certain duration of time), safe harbor requires mandatory employer contributions and more inflexible vesting schedules, and automatic 401k plans allow employers to automatically enroll employees into 401k plans to increase participation.
Arrange a Trust for the Plan’sAssets – A trust must be set up to handle the assets of the 401k plan so that it can solely be used by its participants and beneficiaries. A trustee must be designated in handling the contributions, plan investments, and distributions.
Develop a Recordkeeping System – A recordkeeping system is required to track contributions and distributions of the plan.
Provide Plan Information to Employees Eligible to Participate – As the employer, you are required to inform all employees eligible to participate in the 401k plan about the benefits, features, and other details in a summary plan description (SPD).
Maintaining a 401k Plan
Once established, you as a business owner have certain responsibilities in operating it. If you hired an outside third party to help you establish the 401k, you may also be able to utilize them in managing the plan. The general responsibilities of operating a small business 401k plan can be summed up as:
Participation – Typically a 401k plan includes a mix of rank & file employees and management/owners. Some plans may exclude those that are under 21 years old or resident aliens though.
Contributions – Participants can contribute to a 401k through salary deductions. The type of 401k your business has can affect the nature of the contributions and amounts.
Vesting – Employee salary deferrals are 100% vested. Depending on the type of plan, employer contributions may be immediately vested or may be part of a vesting schedule.
Nondiscrimination – The 401k plan must offer substantial benefits to both regular employees and management. It must not just favor ownership and management. To ensure benefits are proportional for regular employees and management, 401ks may be subject to annual tests.
Investing 401k Money – You have the option of considering a variety of investment options on behalf of employees, or let your employees determine where to direct the accounts.
Fiduciary Responsibilities – These include duties such as following plan documents, acting on behalf of the participants and beneficiaries of the 401k plan, properly reporting plan details to government authorities, and carrying out these duties with care, trust, skill, and diligence.
This is a simplified rundown on the setup and duties in operating a small business 401k for your company. If you are interested in learning more details about setting one up, feel free to ask us via email. MiklosCPA is a Los Angeles-area CPA firm focused on helping businesses succeed through tax strategy consultation and assisting by providing outsourced accounting functions. If you are interested in learning more about our services, please send us an inquiry. We post articles on our website periodically, so follow us on our social media pages for future updates!
MiklosCPA is a top-rated cloud-based Certified Public Accounting firm in Los Angeles, Orange County, California serving small businesses and start-ups.
