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1099 vs W-2 rules

First, keep in mind that the “general rule” is that business owners must issue a Form 1099MISC to each person to whom you have paid at least $600 in rents, services (including parts and materials), prizes and awards or other income payments. You don’t need to issue 1099s for payment made for personal purposes.

A worker will be considered an employee of the “hiring entity” for purposes of the Wage Orders unless the “hiring entity” can establish all three of the following factors:

  • The worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact
  • The worker performs work that is outside the usual course of the hiring entity’s business
  • The worker is customarily engaged in an independently established trade, occupation, or business

The “hiring entity’s” failure to prove any one of these three prerequisites will be sufficient in itself to establish that the worker is an employee for purposes of the Wage Orders.

An independent contractor is self-employed. You enter into a contract with an independent contractor to do a specific role or complete a specific task. Contractors may set their own hours and use their own tools. They may even work for more than one business. Since they are self-employed, you do not withhold taxes from their paychecks; they pay their own taxes and provide their own benefits.

An employee is hired by your business under an employment agreement. You withhold taxes from their wages, train them, pay employment taxes for them, and may provide benefits. Because of this, you have more control over your employees — you dictate what they work on and when they work.

20 percent deduction for passthrough businesses

The Internal Revenue Service issued proposed regulations for a new provision allowing many owners of sole proprietorships, partnerships, trusts and S corporations to deduct 20 percent of their qualified business income.

The new deduction — referred to as the Section 199A deduction or the deduction for qualified business income — was created by the Tax Cuts and Jobs Act. The deduction is available for tax years beginning after Dec. 31, 2017. Eligible taxpayers can claim it for the first time on the 2018 federal income tax return they file next year.

The deduction is generally available to eligible taxpayers whose 2018 taxable incomes fall below $315,000 for joint returns and $157,500 for other taxpayers. It’s generally equal to the lesser of 20 percent of their qualified business income plus 20 percent of their qualified real estate investment trust dividends and qualified publicly traded partnership income or 20 percent of taxable income minus net capital gains.

Deductions for taxpayers above the $157,500/$315,000 taxable income thresholds may be limited. Those limitations are fully described in the proposed regulations.
Qualified business income includes domestic income from a trade or business. Employee wages, capital gain, interest and dividend income are excluded.

Miscellaneous Itemized Deductions: No Longer Deductible

One of the greatest changes brought about by the Tax Cuts and Jobs Act (TCJA) is the elimination of many personal itemized deductions. Starting in 2018 and continuing through 2025, taxpayers will not be able to deduct expenses such as union dues, investment fees, or hobby expenses. However, gambling losses remain deductible.

Personal Expenses that Are No Longer Deductible

Specifically, the TCJA suspended for 2018 through 2025 a large group of deductions lumped together in a category called “miscellaneous itemized deductions” that were deductible to the extent they exceeded 2% of a taxpayer’s adjusted gross income. These include the following deductions:

Unreimbursed job expenses. These are work-related expenses an employee pays out of his or her own pocket. They include:

  • work-related travel, transportation, and meal expenses
  • union dues
  • business liability insurance premiums
  • depreciation on a computer or cellular telephone your employer requires you to use in your work
  • dues to professional societies
  • education (work-related)
  • home office expenses for part of your home used regularly and exclusively in your work
  • expenses of looking for a new job in your present occupation
  • legal fees related to your job
  • subscriptions to professional journals and trade magazines related to your work
  • tools and supplies used in your work, and
  • work clothes and uniforms (if required and not suitable for everyday use).

None of these expenses are deductible during 2018 through 2025. Thus, you should seek to have your employer reimburse you for them. This reimbursement is tax-free as long as you properly document your expenses. Alternatively, you could seek a pay raise to help pay for these expenses, but such a raise would be taxable.

Investment Expenses. Expenses you pay for personal investing are also not deductible as a personal itemized deduction during 2018 through 2025. This includes:

  • investment advisory and management fees
  • fees for legal and tax advice related to your investments
  • trustee fees to manage IRAs and other investment accounts, and
  • rental fees for a safe deposit box.

Tax preparation fees. Tax preparation fees are likewise not deductible for 2018 through 2025. This includes costs for hiring a tax pro or buying tax preparation software or tax publications. It also includes any fee you pay for electronic filing of your return. If you have a tax pro prepare both your personal and business taxes, ask for a separate bill for your business return. Reason: The fees to prepare your business return remain a fully deductible business expense—they are not a personal itemized deduction.

Fees to fight the IRS. During 2018 through 2025, you may not deduct as an itemized deduction attorney fees, accounting fees, and other fees you incur to determine, contest, pay, or claim a refund of any tax.

Hobby expenses. A hobby is an activity you engage in primarily for a reason other than to earn a profit—for example, to have fun. Before 2018, hobbyists were permitted to deduct their hobby-related expenses up to the amount of hobby income they earned each year (but only expenses over 2% of AGI were deductible). The TCJA eliminates the itemized deduction for hobby expenses for 2018 through 2025. This means that you will not be able to deduct any expenses you earn from hobbies during these years. However, you still have to report and pay tax on any income you earn from a hobby! However, if your hobby involves selling goods to customers, you may deduct your costs of goods sold when calculating your hobby income. For example, if your hobby is making and selling pottery, you can deduct the cost of making each pot you sell from your hobby income.

Personal Expenses that Remain Deductible

A few miscellaneous itemized expenses remain deductible during 2018 though 2025 for taxpayers who itemize.

Cash & non-cash contributions. The deduction for cash & non-cash contributions has not been affected by the TCJA.  The charitable giving deduction remains for taxpayers who itemize. Under the new law, this break is limited to 60 percent of adjusted gross income for cash gifts, but you can carry forward by up to five years any amount that exceeds that. For contributions of cash, check or other monetary gift (regardless of amount), you must maintain a record of the contribution: … In addition to deducting your cash contributions, you generally can deduct the fair market value of any other property you donate to qualified organizations.

Gambling losses. The deduction for gambling losses has not been affected by the TCJA. These remain deductible up to the amount of your gambling winnings for the year. You cannot simply reduce your gambling winnings by your gambling losses and report the difference. You must report the full amount of your winnings as income and claim your losses (up to the amount of winnings) as an itemized deduction. These losses are not subject to the 2% limit on miscellaneous itemized deductions.

Investment interest. If you borrow money to purchase an investment, the interest you pay on the loan is called investment interest. Investment interest remains deductible for taxpayers who itemize. However, the deduction is limited to the amount of taxable investment income you earn each year, such as dividends, royalties, or interest. Any disallowed investment interest is carried over to deduct in future years. Ordinarily, investment income does not include any capital gains or qualifying dividends that enjoy favorable tax treatment. However, you can make an election to include long term capital gain and qualifying dividends in your investment income. This can allow you to deduct a larger amount of investment interest. When you do this, however, your long-term capital gain and qualifying dividends must be taxed at your ordinary income tax rates, not the usually lower capital gains rates.

Changes on business expense deductions for meals & entertainment

The Internal Revenue Service issued guidance on the business expense deduction for meals and entertainment following law changes in the Tax Cuts and Jobs Act (TCJA).

The 2017 TCJA eliminated the deduction for any expenses related to activities generally considered entertainment, amusement or recreation.  Taxpayers may continue to deduct 50 % of the cost of business meals if the taxpayer (or an employee of the taxpayer) is present and the food or beverages are not considered lavish or extravagant. The meals may be provided to a current or potential business customer, client, consultant or similar business contact.  For 100% meals provided to employees at a business meeting are accepted if there is proof of the meeting.  We suggest a company email be sent out with the meeting date & time and have a sign-in sheet for employees at the meeting.