If you are in business for yourself, or carry on a trade or business as a sole proprietor or an independent contractor, you generally would consider yourself self-employed and you would file IRS Schedule C, Profit or Loss From Business or Schedule C-EZ, Net Profit From Business with your Form 1040.

Here are six things the IRS wants you to know about self-employment:

1. Self-employment can include work in addition to your regular full-time business activities, such as part-time work you do at home or in addition to your regular job.
2. If you are self-employed you generally have to pay Self-employment Tax. Self-employment tax is a social security and Medicare tax primarily for individuals who work for themselves. It is similar to the social security and Medicare taxes withheld from the pay of most wage earners. You figure SE tax yourself using a Form 1040 Schedule SE. Also, you can deduct half of your self-employment tax in figuring your adjusted gross income.
3. If you are self-employed you generally have to make estimated tax payments. This applies even if you also have a full-time or part-time job and your employer withholds taxes from your wages. Estimated tax is the method used to pay tax on income that is not subject to withholding. If you don’t make quarterly payments you may be penalized for underpayment at the end of the tax year.
4. You can deduct the costs of running your business. These costs are known as business expenses. These are costs you do not have to capitalize or include in the cost of goods sold but can deduct in the current year.
5. To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your field of business. A necessary expense is one that is helpful and appropriate for your business. An expense does not have to be indispensable to be considered necessary.
6. For more information see IRS Publication 334, Tax Guide for Small Business, IRS Publication 535, Business Expenses and Publication 505, Tax Withholding and Estimated Tax

Taxpayers who need certain prior year tax return information can obtain it from the IRS. Here are nine things to know if you need federal tax return information from a previously filed tax return.

1. There are three options for obtaining free copies of your federal tax return information – on the web, by phone or by mail.
2. The IRS does not charge a fee for transcripts, which are presently available for the current tax year as well as the past three tax years.
3. A tax return transcript shows most line items from your tax return as it was originally filed, including any accompanying forms and schedules.  It does not reflect any changes made after the return was filed.
4. A tax account transcript shows any later adjustments either you or the IRS made after the tax return was filed. This transcript shows basic data – including marital status, type of return filed, adjusted gross income and taxable income.
5. To request either transcript online, go to http://www.irs.gov and look for our new online tool called Order A Transcript. To order by phone, call 800-908-9946 and follow the prompts in the recorded message.
6. To request a 1040, 1040A or 1040EZ tax return transcript through the mail, complete IRS Form 4506T-EZ, Short Form Request for Individual Tax Return Transcript. Businesses, partnerships and individuals who need transcript information from other forms or need a tax account transcript must use the Form 4506T, Request for Transcript of Tax Return.
7. If you order online or by phone, you should receive your tax return transcript within 5 to 10 days from the time the IRS receives your request. Allow 30 calendar days for delivery of a tax account transcript if you order by mail using Form 4506T or Form 4506T-EZ.
8. If you still need an actual copy of a previously processed tax return, it will cost $57 for each tax year that you order.  Complete Form 4506, Request for Copy of Tax Return, and mail it to the IRS address listed on the form for your area.  Copies are generally available for the current year as well as the past six years. Please allow 60 days for actual copies of your return.
9. Visit http://www.irs.gov to determine which form will meet your needs. Forms 4506, 4506T and 4506T-EZ can be found at http://www.irs.gov or by calling the IRS forms and publications order line at 800-TAX-FORM (800-829-3676).

There are two federal tax credits available to help you offset the costs of higher education for yourself or your dependents.  These are the American Opportunity Credit and the Lifetime Learning Credit.

To qualify for either credit, you must pay postsecondary tuition and fees for yourself, your spouse or your dependent. The credit may be claimed by the parent or the student, but not by both. If the student was claimed as a dependent, the student cannot file for the credit.

For each student, you can choose to claim only one of the credits in a single tax year. You cannot claim the American Opportunity Credit to pay for part of your daughter’s tuition charges and then claim the Lifetime Learning Credit for $2,000 more of her school costs.

However, if you pay college expenses for two or more students in the same year, you can choose to take credits on a per-student, per-year basis. You can claim the American Opportunity Credit for your sophomore daughter and the Lifetime Learning Credit for your senior son.

Here are some key facts the IRS wants you to know about these valuable education credits:

1. The American Opportunity Credit

• The credit can be up to $2,500 per eligible student.
• It is available for the first four years of post-secondary education.
• Forty percent of the credit is refundable, which means that you may be able to receive up to $1,000, even if you owe no taxes.
• The student must be pursuing an undergraduate degree or other recognized educational credential.
• The student must be enrolled at least half time for at least one academic period.
• Qualified expenses include tuition and fees, coursed related books supplies and equipment.
• The full credit is generally available to eligible taxpayers who make less than $80,000 or $160,000 for married couples filing a joint return.

2. Lifetime Learning Credit

• The credit can be up to $2,000 per eligible student.
• It is available for all years of postsecondary education and for courses to acquire or improve job skills.
• The maximum credited is limited to the amount of tax you must pay on your return.
• The student does not need to be pursuing a degree or other recognized education credential.
• Qualified expenses include tuition and fees, course related books, supplies and equipment.
• The full credit is generally available to eligible taxpayers who make less than $60,000 or $120,000 for married couples filing a joint return.

You cannot claim the tuition and fees tax deduction in the same year that you claim the American Opportunity Tax Credit or the Lifetime Learning Credit. You must choose to either take the credit or the deduction and should consider which is more beneficial for you.

For more information about these credits see IRS Publication 970, Tax Benefits for Education

The first step to filing your federal income tax return is to determine which filing status to use. Your filing status is used to determine your filing requirements, standard deduction, eligibility for certain credits and deductions, and your correct tax. There are five filing statuses: Single, Married Filing Jointly, Married Filing Separately, Head of Household and Qualifying Widow(er) with Dependent Child.

Here are eight facts about the five filing status options the IRS wants you to know so that you can choose the best option for your situation.

1. Your marital status on the last day of the year determines your marital status for the entire year.
2. If more than one filing status applies to you, choose the one that gives you the lowest tax obligation.
3. Single filing status generally applies to anyone who is unmarried, divorced or legally separated according to state law.
4. A married couple may file a joint return together. The couple’s filing status would be Married Filing Jointly.
5. If your spouse died during the year and you did not remarry during 2010, usually you may still file a joint return with that spouse for the year of death.
6. A married couple may elect to file their returns separately. Each person’s filing status would generally be Married Filing Separately.
7. Head of Household generally applies to taxpayers who are unmarried. You must also have paid more than half the cost of maintaining a home for you and a qualifying person to qualify for this filing status.
8. You may be able to choose Qualifying Widow(er) with Dependent Child as your filing status if your spouse died during 2008 or 2009, you have a dependent child and you meet certain other conditions.

There’s much more information about determining your filing status in IRS Publication 501, Exemptions, Standard Deduction, and Filing Information.

Some tax rules affect every person who may have to file a federal income tax return – these rules include dependents and exemptions. Here are six important facts the IRS wants you to know about dependents and exemptions that will help you file your 2010 tax return.

1. Exemptions reduce your taxable income. There are two types of exemptions: personal exemptions and exemptions for dependents. For each exemption you can deduct $3,650 on your 2010 tax return.
2. Your spouse is never considered your dependent. On a joint return, you may claim one exemption for yourself and one for your spouse. If you’re filing a separate return, you may claim the exemption for your spouse only if they had no gross income, are not filing a joint return, and were not the dependent of another taxpayer.
3. Exemptions for dependents. You generally can take an exemption for each of your dependents. A dependent is your qualifying child or qualifying relative. You must list the social security number of any dependent for whom you claim an exemption.
4. If someone else claims you as a dependent, you may still be required to file your own tax return. Whether you must file a return depends on several factors including the amount of your unearned, earned or gross income, your marital status, any special taxes you owe and any advance Earned Income Tax Credit payments you received.
5. If you are a dependent, you may not claim an exemption. If someone else – such as your parent – claims you as a dependent, you may not claim your personal exemption on your own tax return.
6. Some people cannot be claimed as your dependent. Generally, you may not claim a married person as a dependent if they file a joint return with their spouse. Also, to claim someone as a dependent, that person must be a U.S. citizen, U.S. resident alien, U.S. national or resident of Canada or Mexico for some part of the year. There is an exception to this rule for certain adopted children. See IRS Publication 501, Exemptions, Standard Deduction, and Filing Information for additional tests to determine who can be claimed as a dependent.

For more information on exemptions, dependents and whether you or your dependent needs to file a tax return, see IRS Publication 501. The publication is available at http://www.irs.gov or can be ordered by calling 800-TAX-FORM (800-829-3676).

Refund, Return & Cancellation Policies:

Massachusetts law requires that a merchant clearly and conspicuously disclose the store’s refund, return, or cancellation policy. A merchant cannot misrepresent the store’s policy or fail to honor it. Generally, clear and conspicuous disclosure means that the merchant must display a written return policy that the buyer can see and understand before the purchase is made. As long as the product is not defective, a merchant can choose any return policy, provided the merchant discloses this policy to the buyer before the purchase. Stating the policy on the receipt would not satisfy this disclosure requirement, because it is not provided until after the sale.

Defective Merchandise:

A store, however, cannot use its disclosed policy to refuse the return of defective merchandise. When the item purchased is defective, you can choose a repair, replacement or refund. This right is contained in the Implied Warranty of Merchantability law. Under that law, merchants cannot limit your remedies. In addition, this means that if a merchant chooses an “All Sales Final” return policy, it must disclose that policy without limiting your rights. For example, the disclosure of the return policy must be similar to a posting which reads:
“All Sales Final, With the Exception of Defective Goods.”

Merchandise Credits:

When a store issues a merchandise credit for returned goods, you have at least seven years from the date of issue to redeem the credit .

Gift Certificates:

Gift certificates must remain valid for at least seven years and are not subject to any fees. Once you have used 90% of the cards’ value, you may choose to take the remaining value in cash or continue with the gift certificate. The definition of Gift Certificate is expanded to include electronic cards with a banked dollar value, and merchandise credits.  Gift Certificates not clearly marked with an expiration date, and issuance date, shall come with those dates clearly printed on the sales receipt, or available on line.  If the dates are not provided, the Gift Certificate shall be good forever.

Frequently Asked Questions

Qualified Employers

Qualified Employees

Form W-11

Form W-2

Business Tax Credit

Qualified Employers

S-Corps

How does this legislation apply to S-Corporations?

S-Corps are not specifically excluded from taking advantage of the HIRE Act’s tax benefits. The business tax form instructions will address how to claim the business tax credit once the 2011 version is released.

LLCs

Are LLCs eligible as well?

LLCs are not specifically excluded from taking advantage of the HIRE Act’s tax benefits.

Temporary Staffing

Are temporary agencies eligible for the credit?

Temporary agencies can claim the benefits under the HIRE Act like any other employer as long as the employee meets the qualifications under the Act.

Are there any restrictions for temporary staffing businesses?

No, temporary agencies can claim the benefits under the HIRE Act like any other employer as long as the employee meets the qualifications under the Act.

Qualified Employees

1099- Independent Contractors

Does a new employee that previously worked as independent contractor (1099) within the previous 60 days before employment qualify for the tax exemption?

The IRS has not yet issued guidance pertaining to 1099 contractors. We will provide an update as soon as we receive direction. Property of Paychex, Inc. 2 All Rights Reserved

Age

Is there an age limit for the new employees?

No, there are no age restrictions as long as the new hire is eligible to work.

Family Members

If the employee was working for their brother during the previous 60 days, would they qualify?

Yes, as long as the employee is not being hired by the brother’s company and the employee has worked less than 40 total hours over the past 60 days.

Does an owner’s spouse fall into the category of a “related party” under the HIRE Act?

They may, but it depends on the percentage of ownership that the spouse who is hiring the other has in the business. If you have a question whether a particular spouse would qualify, you should contact your CPA or Tax Advisor.

Leave of Absence

If an employee has been on FMLA for more than 60 days, are they eligible for a credit when they come back?

The IRS has not yet issued guidance pertaining to employees on FMLA or on leave. We will provide an update as soon as we receive direction.

If the employee goes on unpaid leave, how does that impact the 52 week wage requirement for the $1,000 business tax credit?

The IRS has not yet issued guidance pertaining to employees on FMLA or on leave. We will provide an update as soon as we receive direction.

Full-Time/Part-Time

Does it matter if the new employee works full-time or part-time?

No. As long as the new hire meets the requirement of a qualified individual, the employer can take the payroll exemption.

I have two companies and hired a previously unemployed person in both entities, both part-time. Can I take the credits on both employers or just for one? The IRS has not yet addressed this question specifically through guidance. However, we would make the educated guess that only the first company that hired the qualified individual would be eligible for the HIRE Act benefits.

Household Employee

What is a household employee?

Household employees are generally employees that are hired to work within a person’s home. Examples are chauffeurs, nannies, or live-in housekeepers. They are generally not people or firms that you hire on a one-time or per-fee basis.

Highly Compensated

Are highly compensated employees eligible?

Yes, there are no salary restrictions, but the HIRE Act Social Security tax credit is naturally limited by the Social Security wage base meaning the maximum amount an employer can save is $6,621.60. Property of Paychex, Inc. 3 All Rights Reserved

Laid-Off Employee

I have employees that were laid off for the winter and re-hired in the spring. Several of them worked under 40 hours for us this winter. Do the employees who did not work at all but were re-hired qualify, and do the employees who worked under 40 hours qualify?

Under this scenario, all of the employees would be qualified since they have not worked greater than 40 hours total over the past 60 days.

Does this apply to those employees called back from lay off for a period of time?

Yes, as long as they meet the definition of a “qualified individual” meaning they have not worked greater than 40 hours total over the past 60 days.

We laid off an employee in January due to lack of work. He returned to work in April. Is he considered a “new hire”?

The same person can be rehired and can be eligible for the credit as long as they have not worked 40 hours over the past 60 days.

New or Replacement Position

If an unemployed individual is hired into a position that was vacant as a result of an internal promotion would that qualify for the Social Security tax credit?

Yes, as long as they meet the definition of a “qualified employee” meaning they have not worked greater than 40 hours total over the past 60 days.

An individual worked for the state government but was laid off and was unemployed the previous 60 days. Would this individual qualify under the HIRE Act?

An individual in this situation would be considered “qualified” as long as the employer is not a government entity and the hire meets the qualifications as an “eligible individual” meaning they have not worked greater than 40 hours total over the past 60 days.

If we lay off an individual person in one position but hire an individual into another position, can we get the credit on the new hire even though our net headcount is the same?

Yes, there is no restriction on this type of transaction, as long as the employee you let go was for cause or they quit voluntarily.

Seasonal Employee

Can you please explain the seasonal employee rules and what happens if the employee is let go before the end of the year?

A seasonal employee would qualify for the HIRE Act incentives as long the employee meets all the eligibility requirements. The employer Social Security tax forgiveness is not dependent on the employee staying on for a year. The employer would not be eligible to take the business retention credit since the employee did not work for 52 consecutive weeks. Property of Paychex, Inc. 4 All Rights Reserved

Self Employed

Does a new employee that was previously self-employed qualify for the tax exemption?

The IRS has not yet issued guidance pertaining to self-employment. We will provide an update as soon as we receive direction.

Severance Pay

We hired someone on March 31, 2010. They were laid off effective December 27, 2009 but received severance pay through February 6, 2009. The new employee believes he did not WORK in those 60 days. Is he an eligible employee?

The IRS has not yet issued guidance pertaining to severance pay. We will provide an update as soon as we receive direction.

A qualified employee received severance pay for the nine months of unemployment. Does he qualify for the Hire Act?

The IRS has not yet issued guidance pertaining to severance pay. We will provide an update as soon as we receive direction.

Student

If a college student received a grant to perform duties as a research assistant during the school term, does this count as employment and exclude him from being a “qualified individual” under the HIRE Act?

This is an employment law question. You should consult with your attorney or employment law expert about your specific situation.

What about hiring a new graduate from college is that person eligible?

Yes, there are no restrictions on hiring high school, college, or graduate students. They are eligible as long as they meet the definition of a “qualified individual” and the employer is in compliance with labor laws.

Temporary Staffing

Are there any restrictions for temporary staffing businesses?

No, temporary agencies can claim the benefits under the HIRE Act like any other employer, as long as the employee meets the qualifications under the Act. Employees hired by a business through a temporary agency are qualified as long as they otherwise fit the definition of a “qualified individual,” meaning they would have worked for the temporary agency or any other business for less than 40 total hours over the prior 60 days.

Tips

Do tips also qualify for the Hire Act credit?

Yes. Property of Paychex, Inc. 5 All Rights Reserved

Union Employees

Do the same rules apply to union employees?

There are no restrictions on union employees in the legislation.

Visa

Does this Act apply to an F-1 employee?

This is an employment law question. You should consult with your attorney or employment law expert about your specific situation.

Are H-2B employees included in the act?

This is an employment law question. You should consult with your attorney or employment law expert about your specific situation.

Are there any visa restrictions on a new employee (i.e. a new graduate doing an OPT)?

This is an employment law question. You should consult with your attorney or employment law expert about your specific situation.

Workers’ Compensation

If an employee has been collecting workers’ compensation and is now coming back to work, does this apply?

The IRS has not yet issued guidance regarding workers’ compensation. We will provide an update as soon as we receive direction.

Form W-11

What is the legal or proper way for the employer to ask the new hire/employee if they qualify for the Social Security tax exemption? Can we compile the list guidelines along with the W-11 form and have it in with the new hire paperwork?

This is an employment law question. You should consult with your attorney or employment law expert about your specific situation.

Is there a deadline to the W-11 form? Can a new hire fill out the W-11 form weeks after being hired as long as the new hire was hired within the eligible date range?

The IRS has indicated that as long as the Form W-11 is signed and received by the employer by the qualified individual by the due date of the Form 941 that the credits are being claimed on, then the credits can still be claimed. In some cases, claiming the credits may have to be done via Form 941-X if the due date for that return has already passed. For more detail, visit www.irs.gov. Property of Paychex, Inc. 6 All Rights Reserved

Form W-2

Why are exempt wages reported on the W-2? What is the impact for the employee on their W-2?

The IRS determined that the Form W-2 was the most convenient way to report these amounts and balance against the total amount reported on Forms 941.These amounts do not impact an employee’s tax situation nor does this amount get reported on the employee’s personal income tax return.

Business Tax Credit

If an employee is laid off for three weeks, but remains on the payroll, would they still be considered a qualified employee for the 52 consecutive week requirement?

As long as you do not formally terminate the employee, we would make the educated guess that the employee would continue to qualify.

Does the 80 percent wage rule, include overtime, paid-time off, tips, commission, etc?

Yes, for purposes of the HIRE Act, all these would count as wages paid and count toward the 80 percent rule.

Does the 52 consecutive week period begin with the employee’s start date or when the employee is first paid?

The IRS has yet to provide guidance surrounding the 52 consecutive week definition.

Is the 52 week period to determine the 80 percent wage rule start with wages paid February 4 or March 19?

The IRS has yet to provide guidance surrounding the 52 consecutive week definition.

If you are a small employer and cover the cost of a portion of your employees’ health insurance there is a new credit that you may qualify for.  The following is a summary of the more important points:

ELIGIBILITY

Both taxable and not-for-profit entities qualify for the credit.  Tax-exempt entities will receive a smaller credit though.  The following bullet points cover the points that you’ll need to apply for the credit:

• You must provide health care and cover at least 50% of the cost of a single rate plan under a qualifying arrangement (amount is capped at the average premium amount for the small group market in the state or area of the state)
• Your payroll must count less than 25 full-time equivalent workers (owners, partners or family members of such and seasonal workers are generally not counted)
• The average annual wages of your payroll must be below $50,000

AMOUNT OF CREDIT

• The credit will be 35% of employer’s health care premium costs incurred during 2010, which gradually increases to 50% in 2014. (25% and 35% for tax-exempt employers).
• The credit phases out gradually for firms with average wages between $25,000 and $50,000 with full-time equivalent employees between 10 and 25.

The credit will be claimed on the employers annual income tax return, (you must have taxable income unless your organization is tax-exempt).  If you cannot use the entire credit, it will be carried forward to future years.

Those are the basics.  As with most things, more details will follow as people begin applying the rules.

201 CMR 17.00 applies to any person or business that receives, stores or transmits personal information of Massachusetts residents.  If during the course of business with your clients you obtain their first name or initial and last name in combination with one or more of the following this law applies to your business:

1. Their social security number;
2. state issued id number, such as a driver’s license number;
3. financial account information including bank account numbers, and;
4. credit or debit card numbers.

The law requires that every person or business that handles the personal information of a Massachusetts resident develop, implement and maintain a WISP that contains a description of administrative, technical and physical safeguards in use by your business to protect personal information. Some safeguards may be as simple as locking file cabinets that contain personal information while others may be more technical in nature and require data encryption or other electronic security protocols.

Developing a written information security program requires a thorough assessment of your business’s needs, current practices and security methods. Fines for not complying with this law are hefty. Why take the risk of not protecting your business? Please call us to schedule an appointment, our knowledge of your business and the provisions of this law will help you be compliant in no time.

• Expanded dependent coverage
• Children with pre-existing conditions cannot be excluded from coverage, and
• Regulation of limitations on certain benefits.

From the small business owner’s point of view it is generally business as usual, including the huge annual rate hikes, but there is some good news in the way of a new credit.  If your business provides health insurance coverage to its employees you may qualify for a tax credit.

Employers who have fewer than 25 employees and average annual wages of less than $50,000, who also pay half or more of the insurance premiums will qualify for a tax credit for up to 35% of 2010 premiums, increasing to 50% by 2014.  The credit will be calculated on form 8941 Credit for Small Employer Health Insurance Premiums.  Not-for-profit employers will be eligible for a 25% credit, increasing to 35% by 2014.

Another Health Care Reform change that you and your employees will notice is that over-the-counter medicines will not be eligible for reimbursement from a flex spending cafeteria plan.  Beginning in 2011, only prescription drugs will qualify.

Your 2011 W-2 will look different also.  From 2011 forward, your W-2 will include the amount of health insurance paid on your behalf during the year.  Does this signal an indication that the government will eventually include that amount as taxable income?  It sure seems that way!