Employee vs. Independent Contractor - Ten Tips for Business Owners

If you are a small business owner, whether you hire people as independent contractors or as employees will impact how much taxes you pay and the amount of taxes you withhold from their paychecks. Additionally, it will affect how much additional cost your business must bear, what documents and information they must provide to you, and what tax documents you must give to them.

Here are the top ten things every business owner should know about hiring people as independent contractors versus hiring them as employees.

Three characteristics are used by the IRS to determine the relationship between businesses and workers: Behavioral Control, Financial Control, and the Type of Relationship.

Behavioral Control covers facts that show whether the business has a right to direct or control how the work is done through instructions, training or other means.

Financial Control covers facts that show whether the business has a right to direct or control the financial and business aspects of the worker's job.

The Type of Relationship factor relates to how the workers and the business owner perceive their relationship.

If you have the right to control or direct not only what is to be done, but also how it is to be done, then your workers are most likely employees.

If you can direct or control only the result of the work done -- and not the means and methods of accomplishing the result -- then your workers are probably independent contractors.

Employers who misclassify workers as independent contractors can end up with substantial tax bills. Additionally, they can face penalties for failing to pay employment taxes and for failing to file required tax forms.

Workers can avoid higher tax bills and lost benefits if they know their proper status.
Both employers and workers can ask the IRS to make a determination on whether a specific individual is an independent contractor or an employee by filing a Form SS-8 – Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding – with the IRS.

You can learn more about the critical determination of a worker’s status as an Independent Contractor or Employee at IRS.gov by selecting the Small Business link. Additional resources include IRS Publication 15-A, Employer's Supplemental Tax Guide, Publication 1779, Independent Contractor or Employee, and Publication 1976, Do You Qualify for Relief under Section 530? These publications and Form SS-8 are available on the IRS Web site or by calling the IRS at 800-829-3676 (800-TAX-FORM).

Contractor vs. Employee
Publication 1779
Publication 15-A

Tax Amnesty 2009 for Individual Taxpayers

Maryland's Tax Amnesty program runs September 1 - October 30 and allows individual and business taxpayers to get a Tax Do Over on past liabilities for most tax types.

The amnesty application is available now, but payments will not be accepted until September 1.
Maryland's Tax Amnesty program covers liabilities for:

Individual income tax
Fiduciary income tax
Pass-through entity nonresident tax
Corporate income tax
Employer withholding tax
Sales and Use tax
Admission and Amusement tax

Taxpayers can take advantage of Maryland's programs for liabilities on returns due on or before December 31, 2008. Approved applicants will have all unpaid civil penalties, except previously assessed fraud penalties, and one-half any unpaid interest waived as part of the program.
Any taxpayer who took advantage of the 2001 Tax Amnesty is NOT eligible for the 2009 program for the same tax covered under the past amnesty initiative.

Determining Your Liability

The Comptroller's Office has made it easy to figure out how much you would owe if approved for amnesty.

If you have an existing liability, please refer to bills you received in the past. By September 1, you'll be able to click on the Amnesty BillPay icon and enter your notice number. With this program, your amnesty eligible liability will be calculated for you. You'll also be able to determine payment plan amounts based on the length of the plan and calculate interest using a separate amnesty calculator. Currently, you can calculate the interest using the interest table provided on the paper amnesty application.

If you have not filed a return recently or can't locate a past bill, email us at amnesty@comp.state.md.us or call us at 1-800-MD-TAXES to determine your liability.

Getting Your Tax Do Over

Getting your Tax Do Over is easy. Simply complete and file a separate application. Nonfilers need to also file an original or amended return for each tax type. Include full payment of the tax and one half the interest or include a payment of at least 10% of the amnesty amount due and indicate your preference for a payment plan.

Paying Up

As of September 1, you can make your payment by direct debit through Amnesty BillPay. You can also pay by credit card check or money order. If you choose to setup a payment plan, you MUST provide bank account information and agree to have your account debited each month for the duration of the plan. All payments plans must be completed by December 31, 2010.

For More Information

More detailed information on Maryland's Tax Amnesty program can be found in our frequently asked questions. The amnesty application is online, but payments will not be accepted until September 1. Call 1-800-MD-TAXES for more assistance or email us at amnesty@comp.state.md.us. In person assistance can also be obtained at any of the agency's 11 local offices.

Deadline Looms for NOL Carryback Election

Time is running out for many small businesses wishing to take advantage of the expanded business loss carryback option included in the American Recovery and Reinvestment Act of 2009. Eligible individuals have until October 15 to choose this expanded carryback option.

Eligible calendar-year corporations have until September 15.

Small businesses that had expenses exceeding their income for 2008 can choose to carry the resulting loss back three, four, or five years, instead of the usual two. This means that a business that had a net operating loss (NOL) in 2008 could carry that loss as far back as tax-year 2003.

The option is available for an eligible small business that has no more than an average of $15 million in gross receipts over a three-year period ending with the tax year of the NOL. This choice may be made for only one tax year.

The 9 Wackiest Tax Deductions

Check out this year's salute to taxpayer creativity -- and see which of the wildly imaginative attempts were OK'd by the IRS.

[Related content: taxes, deductions, IRS, donations, economy]
By Bankrate.com

Did you hear the one about the instant "nephew"? The $35,000 in dance lessons? The new definition of office paperwork?

That's right, it's time for the fourth installment of Bankrate's wackiest tax deductions, our homage to the endlessly creative ways some taxpayers try to limbo under the tax code.

In our first installment, taxpayers tried to write off everything from sperm donations to an arsonist's fee. Our second installment found clever filers trying to deduct a "love shack," doggie day care and a pimped-out Amish buggy. Round three featured otherwise law-abiding Americans trying to write off a $50,000 wedding as a business expense and claim New York City as a dependent.

This year's best cocktail stories -- culled from certified public accountants nationwide, some of whom requested to remain unidentified -- often come with a disclaimer: Do not try this at home. Or in the home office, for that matter.

Talk back: Have a wacky tax story to share?

As audacious as these stories might be, rest assured that the Internal Revenue Service is not amused when taxpayers fail to file, misfile, underreport income or otherwise attempt to avoid taxes.

Ready for some laughs? Behold Bankrate's wackiest tax write-offs, the 2009 edition.

1. Paper-thin home office deduction

CPAs sometimes feel they've opened a Pandora's box when they introduce newly self-employed clients to the wonderland of home office deductions: Give 'em an inch and . . . well, you wind up like one Arizona accountant whose client exhibited an unusual amount of tax swagger.

The client asked for a home office deduction for the toilet paper he bought for his house. No word on the nature of his business.

2. Hell hath no fury . . .

Walt Hatter, a CPA at Hatter & Associates in Fort Worth, Texas, has seen some generous taxpayers in his day, but none compares with the woman who gave it virtually all away.

The client, whose income was about $40,000, brought in noncash receipts from donations made to various charities. The donation total came to roughly the same dollar amount as her income.
Hatter was about to nominate her for sainthood -- until he heard the rest of the story.
"She had gotten a divorce; her husband had cheated on her and just never came back," Hatter says. "He called her up and said he would send a moving van to divide their assets. So, she loaded up everything he would want -- two or three sets of golf clubs and all the furniture, including some of his family antiques -- and took it all to Goodwill. She even had photos of all the stuff!"

It fell to Hatter to inform her that she could deduct only up to 50% of her adjusted gross income.
"We wound up with something like $15,000 in contributions," he says. "I just knew that that return was going to get audited, but it never did."

3. At least it wasn't 'travel and entertainment'

Sometimes business owners will try to slide a fast one by the IRS by classifying a business deduction in a category where the dollar signs might not raise an eyebrow.

One such fastball didn't pass the eyebrow test with this Oklahoma accountant, however.
"We were reviewing a business client's accounting entries and noted a check for over $2,000 written to a gynecologist. It was classified on the business books as 'repairs and maintenance.'"
MSN Money slide show

4. Bubble-bath credit

Taxpayers sometimes get into hot water by deducting their spas and swimming pools as medical deductions or, more boldly, as business expenses.

"We had a woman who tried to deduct her tricked-out Jacuzzi hot tub due to medical reasons," says Elizabeth Dittrick of Dittrick and Associates in Burton, Ohio. "That can be a legitimate expense -- but not the underwater speakers, the mood lighting and the in-tub stereo. So we ended up deducting a portion of it but removed the sound and light show. She did use it for medical reasons; she had arthritis and had a note from her doctor."

It was going to be a bit longer swim for one New Jersey accountant's client.
"A taxpayer wanted to write off a $100,000 swimming pool for medical reasons," says the accountant. "Swimming, he explained quite seriously, relaxed him so he could earn more money, which in turn would be taxable."
Uh . . . no.

5. Beautify your return

Ah, nature! So peaceful, so inspiring, so . . . deductible?

It can be, at least according to Allyson Baumeister, a CPA at Sanford, Baumeister & Frazier in Fort Worth.

"I had a lady client who didn't like some of her really mature trees, they didn't fit into her new landscaping theme," she says. "So, she dug them out and donated them to charity."

"She had to get somebody to appraise the value of the trees, but the IRS allowed it," Baumeister says.

6. Unmarried, filing weirdly

Common-law marriages can create tax complications, as Hatter found out when two young, single clients who had been living together for a number of years decided to file jointly as a married couple.

"You can do that in Texas by meeting certain criteria, living together for so long," Hatter says. "The problem is, when you decide that you don't want to live together anymore, it creates all sorts of problems with the IRS."

That's because once a couple files jointly, everything thereafter is keyed off the male partner's Social Security number.

"You don't have to go through a divorce per se; it just takes a little letter-writing campaign to the IRS to get it fixed," Hatter says.

7. Dancing with the IRS

Who doesn't get a little carried away with the grace and fluidity of ballroom dancing? But according to a Tucson, Ariz., CPA, some dance moves fail to charm the tax man.

The accountant's client was an elderly woman who had once been a university professor. When her doctor suggested she take up dancing to improve her arthritic hips, she enrolled at a dance studio.

"The first year, she brought in her tax data and wanted to deduct over $8,000 in dance lessons," the accountant says. "I got her to have her doctor write a letter, and I believe I did deduct it the first year."

Ah, but you know how infectious ballroom dancing can be.

"The second year, she brought in receipts totaling over $35,000 for dance lessons and another $18,000 for gowns and expenses to travel on cruises for herself and her 'instructor' from this dance studio; he was in his 20s and she was about 85 by this time," the accountant says. "I was appalled and obviously did not deduct these expenses as medical -- although I was tempted to call it a theft loss."

The accountant notified adult protective services, which launched an investigation of the situation. Her client died before it was completed.

8. Of guard cats and canine contractors

Taxpayers become pretty creative when it comes to devising ways to deduct their pets on their tax returns. In this series alone, we've featured one pet lover who claimed his dog as a dependent, another who attempted to write off the dog food for his "home security system" and yet another who claimed Fido as a landscaping subcontractor.

Ed Mendlowitz, a CPA at WithumSmith+Brown in New Brunswick, N.J., has heard it so much that he actually devised a tongue-in-cheek response:

"When I have a client ask me if they can deduct their cat or dog, I usually inquire in a very serious tone about their pet's age and whether the cat or dog is a full-time student. Parrots and other long-lived animals, by contrast, may qualify for elderly benefits."

9. Costly adoption

A Kissimmee, Fla., CPA inherited the case of a 65-year-old woman who took in a 20-something student renter and handyman. She liked the lad so much she decided to welcome him into her family -- at least on her taxes.

The woman's original accountant never questioned the deduction, which incidentally enabled the woman to not claim the rental income from her new "nephew."

"There are guidelines CPAs use to determine whether or not a relative by blood, marriage or adoption is considered a dependent," the Kissimmee CPA says. "In this case, the young man was none of the above. She was confusing emotional attachment with an actual factual definition."

Long story short: The IRS caught on three years later and slapped "Auntie" with $5,000 in back taxes and a $2,000 penalty for failing to disclose income.

Her CPA came to the rescue, filed amended returns and eventually reclaimed part of the excess taken by the IRS.

Ironically, because the renter had remodeled part of her home, "Auntie" could have offset that expense against the rental income and ended up with a larger and legitimate deduction than by claiming him as a dependent.

This article was reported by Jay MacDonald for Bankrate.com.

Celebrity Tax Debtors - No One Can Dodge the Rath of the IRS

Snoop Dogg Hit with Tax Lien
Rap singer and actor Snoop Dogg is facing a tax lien from the state of California, along with assault charges. His real name, Calvin Broadus Jr., shows up on a list of California tax scofflaws, alongside the likes of Burt Reynolds, Dionne Warwick and Sinbad. Read more

Pitcher Koosman to Plead Guilty to Tax Charges
Former baseball pitcher Jerry Koosman is expected to plead guilty later this month to charges stemming from his failure to file a tax return for 2002. Read more

MC Hammer Raps IRS over Tax Debts
August 13, 2009
Rap star MC Hammer claims the IRS is giving him a bad rap after the government filed three tax liens against him, including one in July for over $625,000.

Michael Jackson Doctor Faces Tax Lien
August 6, 2009
Dr. Conrad Murray, the doctor who attended Michael Jackson during his last days, is facing a $21,728 tax lien from the state of California.

Nicolas Cage Hit with $6.2 Million Tax Lien
August 3, 2009
Actor Nicolas Cage is facing a whopping tax lien of $6,257,005 from the Internal Revenue Service.

Henry Louis Gates’ Foundation to Revise Tax Return
July 28, 2009
A nonprofit foundation run by Harvard professor Henry Louis Gates Jr. is filing an amended 2007 tax return after it was found to have mischaracterized $11,000 in payments to officials as research grants.

‘Stone Cold’ Steve Austin Hit with Tax Lien
July 27, 2009
Actor and retired professional wrestler “Stone Cold” Steve Austin has been body-slammed by California tax authorities with a $22,000 tax lien.

Baldwin Brother Goes Bankrupt
July 22, 2009
Actor Stephen Baldwin and his wife have filed for Chapter 11 protection after incurring millions in debt, including a hefty sum owed to the IRS.

Tax Liens Filed Against Foxy Brown and Toni Braxton
July 20, 2009
Two high-profile singers, Foxy Brown and Toni Braxton, are facing large tax liens, according to recent reports.

Hatch Turned Down for Survivor Samoa Trip
July 14, 2009
Richard Hatch, the first-season winner of “Survivor,” has requested an early release from his in-home jail sentence for tax evasion so he can rejoin the show and win enough to pay back the IRS, but the judge said no.

Former QB Kosar Files for Bankruptcy
June 22, 2009
Former NFL quarterback Bernie Kosar has filed for bankruptcy, listing debts to the IRS and Broward County, Fla., along with debts arising from the collapse of the Florida real estate market.

Last Charge Dismissed for Indy 500 Champ Castroneves
May 26, 2009
The final charge against race car driver Helio Castroneves in his tax case was dismissed just two days before he went on to win the Indianapolis 500 for the third time.

Feds Sue Mike Tyson’s Ex, Robin Givens, over Tax Bill
May 8, 2009
Federal authorities have sued actress Robin Givens, ex-wife of heavyweight boxer Mike Tyson, for nearly $300,000 in unpaid taxes, interest and penalties stretching back 13 years.

Shooting for the stars
April 19, 2009
The Internal Revenue Service now has a new interest in sports and entertainment - and not just as a spectator.

CPA Sued for Martha Stewart's Daughter's Taxes
April 15, 2009
Wants $334,000 for alleged mistakes.

Stars Make California List of Tax Scofflaws
April 14, 2009
Burt Reynolds, Sinbad and Dionne Warwick get named and shamed.

Video: Joe the Plumber Takes on the IRS
April 6, 2009
Joe the Plumber has made his next mission the abolition of the Internal Revenue Service.

HHS Nominee Pays $7,040 in Back Taxes
April 1, 2009
Secretary of Health and Human Services nominee Kathleen Sebelius became the latest prospective Cabinet member to run afoul of the Tax Code after she admitted to recently paying $7,040 in back taxes and $878 in interest.

U.S. Trade Rep Nominee to Pay Back Taxes
March 3, 2009
Ron Kirk, the Obama administration's nominee for U.S. Trade Representative, has agreed to pay $9,975 in back taxes he owed on $37,750 in speaking fees.

Obama Budget Includes Tax Increases on Wealthy
February 26, 2009
President Barack Obama presented his budget for fiscal 2010, including about $318 billion in tax increases mainly targeted at the wealthy.

Palin Owes Taxes on Per Diem Payments
February 20, 2009
Alaska Governor Sarah Palin will have to pay taxes on $16,951 in travel allowances that she billed the state for days she worked from home in Wasilla.

Pro Golfer Thorpe Charged with $1.6M in Back Taxes
February 12, 2009
The Internal Revenue Service has charged PGA champion golfer Jim Thorpe with income tax evasion for failing to pay $1.6 million in back taxes.

Tips on Tax Compliance for Cabinet Nominees
February 11, 2009
The Association of Chartered Certified Accountants has some advice for Obama administration officials and erstwhile nominees who have run afoul of the Tax Code, as well as regular taxpayers.

Labor Secretary Nominee Has Tax Problems Too
February 6, 2009
In the latest sign of tax trouble in the Obama cabinet, Labor Secretary-designate Hilda Solis' husband had tax liens filed against him.

Judge Denies Dismissal of Helio Castoneves' Tax Charges
February 6, 2009
Race car driver and "Dancing with the Stars" champion Helio Castroneves will be facing the music after a judge denied a motion to dismiss some of the counts in his upcoming tax evasion trial.

'Girls Gone Wild' Founder Won't Go Wild Anymore
February 5, 2009
Girls Gone Wild founder Joe Francis was arrested after he showed up five hours late to a court hearing in his tax evasion case.

Heavy Metal Rocker Cheated by Accountant
February 3, 2009
Rock guitarist Yngwie Malmsteen has won $820,000 in damages from his former accountant.

Daschle Bows Out After Tax Problems
February 3, 2009
Tom Daschle, President Obama's pick to lead the Department of Health of Human Services, has withdrawn his nomination amid revelations that he recently owed more than $140,000 in taxes and interest.

Daschle Apologizes for Unpaid Taxes
February 2, 2009
President Obama's pick to lead the Department of Health and Human Services, former Senate Majority Leader Tom Daschle, apologized for owing $140,000 in back taxes and interest.

Geithner Admits Back Tax Problems
January 14, 2009
Treasury Secretary-designate Timothy Geithner admitted owing more than $34,000 in self-employment taxes between 2001 and 2004.

Kerik Pleads Not Guilty to Tax Charges
January 5, 2009
Former New York City Police Commissioner Bernard Kerik pleaded not guilty last week to tax fraud charges.

NBA Athlete Charities Not Playing for Keeps
December 30, 2008
An analysis of charitable foundations set up by professional basketball players found that many of them spend only a fraction of their money on charitable activities.

IRS Raps Doug E. Fresh with Tax Lien
December 22, 2008
Rap singer Doug E. Fresh is facing tax liens from the federal and state government, along with foreclosure of three homes.

Magic Johnson Scores with Jackson Hewitt
November 17, 2008
Pro basketball legend Earvin "Magic" Johnson has signed a deal with Jackson Hewitt Tax Service to become the company's spokesman in a new advertising campaign.

Ex-NFL Lineman Gets Three Years for Tax Evasion
November 11, 2008
Former NFL player Ben Coleman was sentenced to three years in jail on charges of federal tax evasion, identity theft and the filing of false loan applications.

Melissa Etheridge Plans Tax Protest
November 10, 2008
Singer Melissa Etheridge said she will stop paying her California state taxes after voters there approved a ballot measure banning gay marriages.

Obama Presidency Could Worry Tax Clients
November 7, 2008
A tax attorney predicts that small businesses and high-net-worth individuals will need tax-planning advice to help protect their assets from anticipated changes in tax law.

Pro Baseball Players May Avoid Obama Tax Hike
November 6, 2008
Major League Baseball players and their agents are already looking for ways to skirt a steep income tax hike after President-elect Barack Obama takes office.

PKF North American Uses Second City
October 31, 2008

One Too Many Emperors
October 28, 2008
Let me tell you a tale about a modern day emperor with the initials H.P.

Cindy McCain Releases 2007 Tax Information
October 21, 2008
Cindy McCain has released the summary pages of her recently filed 2007 federal tax return.

Abba's Bjorn Wins $11.5M in Swedish Tax Appeal
October 16, 2008
Former Abba band member Bjorn Ulvaeus has won a legal case against the Swedish tax authorities that will return to him the equivalent of $11.5 million in taxes that he has already paid.

Dear Dustin Hoffman: It's No Longer "Plastic"
October 7, 2008
Some thirty-plus years later, let's understand that Benjamin Braddock, Dustin's character, is now a Baby Boomer.

Palin Releases Tax Returns
October 7, 2008
Republican vice presidential candidate Gov. Sarah Palin has released her 2006 and 2007 tax returns.

'Dancing with the Stars' Winner Stepped on by IRS
October 6, 2008
Race car driver Helio Castroneves, who has won the Indianapolis 500 twice, as well as "Dancing with the Stars," couldn't speed away from tax evasion charges after a grand jury indicted him Thursday.

Too Many Emperors and Empires for Transparency
September 30, 2008
Sleight-of-hand and spin is what got us into this severe and long-lasting financial crisis.

Nicolas Cage Pays $666,000+ to Settle with IRS
September 9, 2008
Actor Nicolas Cage, whose movie Bangkok Dangerous topped the weekend box office numbers, has settled his tax debts with the Internal Revenue Service for $666,000, plus interest.

IRS Places Tax Lien on Ruben Studdard
August 26, 2008
American Idol winner Ruben Studdard is facing tax liens from the Internal Revenue Service and the state of Alabama for failing to pay more than $193,000 in back taxes.

Tax Bill Bankrupts U.K. Pop Star
August 25, 2008
British singer and reality TV star Kerry Katona has been forced into bankruptcy after trying to pay off her tax bill.

IRS Celebrity Snoop Gets Three Years' Probation
August 21, 2008
An Internal Revenue Service employee who improperly accessed the financial information of 200 celebrities and sports figures was sentenced to three years' probation, 60 hours of community service and a $1,000 penalty.

Hammertime Being "Hammered" by the IRS

Rap star MC Hammer claims the IRS is giving him a bad rap after the government filed three tax liens against him, including one in July for over $625,000.
The singer, whose real name is Stanley Burrell, said the back taxes he allegedly owes are from 15 years ago, and he is disputing the sum with the IRS.

“I paid the IRS 100 percent of their claim,” said Hammer in a statement. “In the past year or so, they decided — wrongly — that I owed them additional taxes from 15 years ago. I am contesting this claim through my tax attorneys and my case is making its way through the IRS appeal process. I hope to be successful.”

The singer, whose hits have included “U Can’t Touch This,” “Turn This Mutha Out,” and “Pray,” said that the alleged past due amount of approximately $625,000 is not related to his current successful business ventures and have no impact on them. Hammer went bankrupt in 1996, but now owns or works on several businesses including Dance Jam, his own record label, production company, and musical appearances, as well as other ventures.

Hammer is currently featured on “Hammertime,” a television show on the A&E network. He also noted that he has more 1.2 million followers on Twitter at http://twitter.com/Mchammer. He was affected by the recent outage of Twitter.

Hammer claimed that news reports incorrectly give the impression that he is facing new financial issues, but he insisted that is not the case.

“I think the IRS claim is wrong and unfair,” he said. “When there was a sum of $7 million available, the IRS took the amount they said was due them. Now they want to come back for more now that it's 15 years later? That’s just not right and I’m fighting that nonsense.”

Cash Flow - The Pulse of Your Business

Many small business owners do not fully understand their cash flow statement, This is a shocking fact considering that all businesses essentially run on cash, and cash flow is the life-blood of your business.

Some business experts go so far as to say a healthy cash flow is even more important than your business's ability to deliver its goods and services! You may find that perspective hard to swallow, but consider this - if you fail to satisfy a customer and lose that customer's business, you can always work harder to please the next customer. But if you fail to have enough cash to pay your suppliers, creditors, or your employees, you're out of business!

What Is Cash Flow?

Cash flow, simply defined, is the movement of money in and out of your business; these movements are called inflow and outflow respectively. Inflows for your business primarily come from the sale of goods or services to your customers. The inflow only occurs when you make a cash sale or collect on receivables, however. Remember, it is the cash that counts! Other examples of cash inflows are borrowed funds, income derived from sales of assets, and investment income from interest.

Outflows for your business are generally the result of paying expenses. Examples of cash outflows include paying employee wages, purchasing inventory or raw materials, purchasing fixed assets, operating costs, paying back loans, and paying taxes.

Note: An accountant is the best person to help you learn how your cash flow statement works.

Please contact us and we can prepare, if needed, and explain where the numbers come from in your cash flow statement.

Cash Flow Verses Profit

Profit and Cash flow are two entirely different concepts, each with entirely different results. The concept of profit is somewhat broad and only looks at income and expenses over a certain period of time, say a fiscal quarter. Profit is a useful figure for calculating your taxes and reporting to the IRS.

Cash flow, on the other hand, is a more dynamic tool focusing on the day-to-day operations of a business owner. It is concerned with the movement of money in and out of a business. But more importantly, it is concerned with the times at which the movement of the money takes place.

Theoretically even profitable companies can go bankrupt. It would take a lot of negligence and total disregard for cash flow, but it is possible. Consider how the difference between profit and cash flow relate to your business.

Example: If your retail business bought a $1,000 item and turned around to sell it for $2,000, then you have made a $1,000 profit. But what if the buyer of the item is slow to pay his or her bill, and six months pass before you collect on the account? Your retail business may still show a profit, but what about the bills it has to pay during that six-month period? You may not have the cash to pay the bills despite the profits you earned on the sale. Furthermore, this cash flow gap may cause you to miss other profit opportunities, damage your credit rating, and force you to take out loans and create debt. If this mistake is repeated enough times you may even go bankrupt!

Analyzing Your Cash Flow

The sooner you learn how to manage your cash flow, the better your chances for survival will be. Furthermore, you will be able to protect your company's short-term reputation as well as position it for long-term success.

The first step towards taking control of, and properly managing your company's cash flow is to analyze the components that affect the timing of your cash inflows and outflows. A thorough analysis of these components will reveal problem areas that lead to cash flow gaps in your business. Narrowing, or even closing, these gaps is the key to cash flow management.

Some of the more important components to examine are:

Accounts Receivable.

Accounts receivable represent sales that have not yet been collected in the form of cash. An accounts receivable is created when you sell something to a customer in return for his or her promise to pay at a later date. The longer it takes for your customers to pay on their accounts, the more negative affects there will be on your cash flow.

Credit terms.

Credit terms are the time limits you set for your customers' promise to pay for the merchandise or services purchased from your business. Credit terms affect the timing of your cash inflows. One of the simplest ways to improve cash flow is to get customers to pay their bills more quickly.
Credit policy. A credit policy is the blueprint you use when deciding to extend credit to a customer. The correct credit policy is necessary to ensure that your cash flow doesn't fall victim to a credit policy that is too strict or to one that is too generous.

Inventory.

Inventory describes the extra merchandise or supplies your business keeps on hand to meet the demands of customers. An excessive amount of inventory hurts your cash flow by using up money that could be used for other cash outflows. Too many business owners buy inventory based on hopes and dreams instead of what they can realistically sell. Keep your inventory as low as possible.

Accounts payable and cash flow.

Accounts payable are amounts you owe to your suppliers that are payable sometime within the near future, "near" meaning 30 to 90 days. Without payables and trade credit you'd have to pay for all goods and services at the time you purchase them. For optimum cash flow management, you'll need to examine your payables schedule.

Some cash flow gaps are created intentionally. That is, a business will sometimes purposefully spend more cash to achieve some other financial results. For example, a business may purchase extra inventory to take advantage of quantity discounts, accelerate cash outflows to take advantage of significant trade discounts, or spend extra cash to expand its line of business.

For other businesses, cash flow gaps are unavoidable. Take, for example, a company that experiences seasonal fluctuations in its line of business. This business may normally have cash flow gaps during its slow season and then later fill the gaps with cash surpluses from the peak part of its season. Cash flow gaps are often filled by external financing sources. Revolving lines of credit, bank loans, and trade credit are just a few of the external financing options available that you may want to discuss with us.

Monitoring and managing your cash flow is an important task to perform in order to ensure the vitality of your business. The first signs of financial woe will appear in your cash flow statement, giving you time to recognize a forthcoming problem and plan a strategy to deal with it.

Furthermore, with periodic cash flow analysis, you can head off those unpleasant financial glitches by recognizing which aspects of your business have the potential to cause cash flow gaps. With cash flow management and analysis, you will be able to plan on how you're going to direct your cash surplus with assurance that you will have adequate funds to cover day-to-day expenses.

Have You Filed Your 2008 Return?

The failure to file a federal tax return can be costly - whether you end up owing more or missing out on a refund.

There are several reasons taxpayers don't file their taxes. Perhaps you didn't know you were required to file. Maybe, you just kept putting it off and simply forgot. Whatever the reason, it's best to file your return as soon as possible. If you need help, even with a late return, the IRS is ready to assist you.

Here are some things to consider:

Failure to File Penalty.

If you owe taxes, a delay in filing may result in a "failure to file" penalty, also known as the "late filing" penalty, and interest charges. The longer you delay, the larger these charges grow.

Losing Your Refund.

There is no penalty for failure to file if you are due a refund. However, you cannot obtain a refund without filing a tax return. If you wait too long to file, you may risk losing the refund altogether.

The deadline for claiming refunds is three years after the return due date.
EITC. Individuals who are entitled to the Earned Income Tax Credit must file their return to claim the credit even if they are not otherwise required to file.

Whether or not you must file a tax return will depend upon a number of factors, including your filing status, age, and gross income.

Do You Know What's In Your Social Security Account?

Request a Personal Earnings and Benefit Estimate Statement from the Social Security Administration. This can be done using Form SSA-7004 or over the Internet. This statement summarizes your social security earnings history and provides an estimate of the benefits to which you are entitled. It is important to verify that you have been credited for all of your earnings. You can also use this statement in your retirement planning.

Cash for Clunkers Vouchers Taxable to Auto Dealers

The IRS has clarified that the vouchers provided to new car purchasers under the "Cash for Clunkers" program are income to the auto dealer. The vouchers represent part of the cost of the vehicle and must be included in the dealership’s gross income.

In a typical dealership transaction, a customer may pay for the vehicle in cash, finance the full vehicle price, or finance something less than the full selling price after the application of a cash down payment or a trade-in vehicle allowance. A dealership’s gross receipts include the full selling price of the vehicle, regardless of the form of the customer’s payment. In addition, to the extent the dealership receives any scrap value for the customer’s trade-in, that scrap amount is includible in the dealership’s income.

The credit and ultimate payment by the National Highway Traffic Safety Administration (NHTSA) to the dealership under the CARS program is includible in the dealership’s gross receipts from the sale of the vehicle. The dealership must include this income in the year the vehicle is sold.

Does The IRS Owe You Money?

Who couldn’t use a little extra cash this summer! The IRS may have some money for you.

If you have not filed a prior year tax return and are due a refund, you should consider filing the return to claim that refund. If you are missing a refund for a previously filed tax return, you should contact the IRS to check the status of your refund and confirm your current address.

Unclaimed Refunds

Some people may have had taxes withheld from their wages but were not required to file a tax return because they had too little income. Others may not have had any tax withheld but would be eligible for the refundable Earned Income Tax Credit.

To collect this money a return must be filed with the IRS no later than three years from the due date of the return.

If no return is filed to claim the refund within three years, the money becomes the property of the U.S. Treasury.

There is no penalty assessed by the IRS for filing a late return qualifying for a refund.

Current and prior year tax forms and instructions are available on the Forms and Publications web page of IRS.gov or by calling 800-TAX-FORM (800-829-3676).

Information about the Earned Income Tax Credit and how to claim it is also available on IRS.gov.
Undeliverable Refunds

Were you expecting a refund check but didn't get it?

Refund checks are mailed to your last known address. Checks are returned to the IRS if you move without notifying the IRS or the U.S. Postal Service.

You may be able to update your address with the IRS on the “Where’s My Refund?” feature available on IRS.gov. You will be prompted to provide an updated address if there is an undeliverable check outstanding within the last 12 months.

You can also ensure the IRS has your correct address by filing Form 8822, Change of Address, which is available on IRS.gov or can be ordered by calling 800-TAX-FORM (800-829-3676).

If you do not have access to the Internet and think you may be missing a refund, you should first check your records or contact your tax preparer. If your refund information appears correct, call the IRS toll-free assistance line at 800-829-1040 to check the status of your refund and confirm your address.

Do You Need to Amend Your Return?

You’ve discovered an error or determined that you are entitled to a previously unclaimed credit or deduction, after your tax return has been filed. Do you need to amend your tax return?

The IRS usually corrects math errors or requests missing forms – such as W-2s or schedules – when processing an original return. In these instances, do not amend your return.

However, you should file an amended return if any of the following were reported incorrectly:

Your filing status
Your dependents
Your total income
Your deductions or credits

You may also elect to amend your 2008 return if you are eligible to claim the new first-time homebuyer credit of up to $8,000 for a qualified 2009 home purchase. The amended tax return will allow you to claim the homebuyer credit on your 2008 return without waiting until next year to claim it on the 2009 return.

Use Form 1040X, Amended U.S. Individual Income Tax Return, to correct a previously filed Form 1040, 1040A or 1040EZ submitted electronically or by mail. Be sure to enter the year of the return you are amending at the top of Form 1040X. If you are amending more than one tax return, prepare a 1040X for each return and mail them in separate envelopes to the IRS processing center for the area in which you live. The 1040X instructions list the addresses for the centers.

The Form 1040X has three columns. Column A is used to show original or adjusted figures from the original return. Column C is used to show the corrected figures. The difference between the figures in Columns A and C is shown in Column B. There is an area on the back of the form where you explain the specific changes being made to the return and the reason for each change.

If the changes involve other schedules or forms, attach them to the Form 1040X. For example, if you are filing a 1040X because you have a qualifying child and now want to claim the Earned Income Credit, you must attach a Schedule EIC to show the qualifying person's name, year of birth and Social Security number.

If you are filing to claim an additional refund, wait until you have received your original refund before filing Form 1040X. You may cash that check while waiting for any additional refund. If you owe additional tax for 2008, you should file Form 1040X and pay the tax as soon as possible to limit interest and penalty charges. Interest is charged on any tax not paid by the due date of the original return, without regard to extensions.

Generally, to claim a refund, you must file Form 1040X within three years from the date you filed your original return or within two years from the date you paid the tax, whichever is later.
Form 1040X and instructions are available at IRS.gov or by calling 800-TAX-FORM (800-829-3676).

Form 1040X, Amended U.S. Individual Income Tax Return

The Toy King vs. The IRS

Toy industry executive Jeffrey P. Chernick has pleaded guilty to charges of filing a false tax return, the third U.S. client of Swiss bank UBS to plead guilty to tax charges.

Chernick, who owns a corporation in New York that represents toy manufacturers in China and Hong Kong, appeared Tuesday before Judge James I. Cohn in Ft. Lauderdale, Fla., and accepted responsibility for concealing more than $8 million in Swiss bank accounts.

According to prosecutors, Chernick’s 1040 return for 2007 failed to report that he had a bank account with UBS, and the income he earned on the account. The UBS account was opened in the name of Simba International Ltd., a nominee Hong Kong corporation.

Beginning in the mid-1970s, Chernick set up a Hong Kong corporation and opened offshore bank accounts in order to conceal from the IRS commissions paid to him for toy sales, according to prosecutors. In total, he was the beneficial owner of approximately $8 million in offshore assets maintained in accounts in the name of nominee entities, including Simba, at UBS and other Swiss banks.

In 2000, UBS entered into an agreement to begin providing the IRS with information on bank accounts in which the beneficial owner was a U.S. citizen. Around the same time, one of Chernick’s Swiss bankers left UBS for a smaller, less prominent Swiss bank. The banker told Chernick he had left UBS in part because the smaller bank would not be subject to Washington’s scrutiny and could not be pressured by the U.S. government to disclose certain information to American authorities. Following the banker’s advice, Chernick agreed to invest some of his assets with the smaller Swiss bank.

Between 2002 and 2008, Chernick discussed his offshore accounts with the former UBS banker and other Swiss financial service providers. The meetings took place at various U.S. locations, including hotels in New York City. During these meetings, Chernick, the Swiss bankers and Swiss financial service providers would discuss Chernick’s investments held in his offshore accounts, as well as the payment of fees for banking services rendered by Hong Kong and Swiss financial service providers. In July 2008, despite Chernick’s concerns about an ongoing investigation into the activities of UBS, a Swiss financial service provider convinced him not to disclose his offshore accounts, nor to file amended returns or pay the IRS any additional taxes he owed.

In order to have access to the millions of dollars he concealed offshore, he allegedly used credit cards linked to his offshore Swiss bank accounts to make large purchases while traveling abroad.

With the assistance of Swiss bankers and other financial service providers, Chernick also set up a sham $700,000 loan between Simba and a second Hong Kong entity in order to repatriate funds into the U.S. to purchase property adjacent to his home in New York.

Judge Cohn scheduled Chernick’s sentencing for Oct. 30, 2009. He faces a maximum sentence of three years in prison.

Chernick is the latest UBS client to plead guilty to tax charges. In June, Boca Raton accountant Steven Michael Rubinstein pleaded guilty to filing a false tax return, as did Robert Moran, a Ft. Lauderdale yacht broker, in April.

In February, UBS signed a deferred prosecution agreement with the U.S. Justice Department, agreeing to pay $780 million and provide the names of 250 U.S. clients who had been accused of tax fraud. However, the IRS has a lawsuit pending in a Miami court to force the bank to reveal the identities and holdings of an additional 52,000 UBS clients by issuing “John Doe” summonses.

The two sides have delayed the trial and are reportedly in negotiations on a settlement.

What Is The Car Allowance Rebate System?

The CAR Allowance Rebate System (CARS) is a $1 billion government program that helps consumers buy or lease a more environmentally-friendly vehicle from a participating dealer when they trade in a less fuel-efficient car or truck. The program is designed to energize the economy; boost auto sales and put safer, cleaner and more fuel-efficient vehicles on the nation's roadways. Consumers will be able to take advantage of this program and receive a $3,500 or $4,500 discount from the car dealer when they trade in their old vehicle and purchase or lease a newone. Consumers you do not need to register anywhere or at anytime for this program.

Consumer Bill of Rights

Qualified consumers may participate in the CARS Program between July 1, 2009 and November 1, 2009 or when authorized funds are no longer available.

Qualified consumers will receive a credit of $3,500 or $4,500 for an eligible trade-in toward the purchase of lease of an approved vehicle under CARS Program.

Qualified consumers will receive the $3,500 or $4,500 credit at the time the purchasetheir new vehicle.

Dealers must provide consumers with any other advertised rebates or discounts inaddition to the credit they receive through the CARS Program.

Consumers should expect to conduct their deals at their dealership of choice, not on theInternet.

Consumers should expect the dealers to provide their best estimate of the scrap value fortheir eligible trade-in vehicle. Dealers are allowed to deduct $50 from this value for their administrative costs.

Consumers should expect that all information collected through the CARS Program willbe kept confidential. Social Security numbers are not required for a CARS transaction.

IRS WARNING: FIRST-TIME HOMEBUYERS FRAUD

The Internal Revenue Service today announced its first successful prosecution related to fraud involving the first-time homebuyer credit and warned taxpayers to beware of this type of scheme.

On Thursday July 23, 2009, a Jacksonville, Fla.-tax preparer, James Otto Price III, pled guilty to falsely claiming the first-time homebuyer credit on a client’s federal tax return. Price faces the possibility of up to three years in jail, a fine of as much as $250,000, or both.

To date, the IRS has executed seven search warrants and currently has 24 open criminal investigations in pursuit of potential instances of fraud involving the credit. The agency has a number of sophisticated computer screening tools to quickly identify returns that may contain fraudulent claims for the first-time homebuyer credit.

“We will vigorously pursue anyone who falsely tries to claim this or any other tax credit or deduction,” said Eileen Mayer, Chief, IRS Criminal Investigation. “The penalties for tax fraud are steep. Taxpayers should be wary of anyone who promises to get them a big refund.”

Whether a taxpayer prepares his or her own return or uses the services of a paid preparer, it is the taxpayer who is ultimately responsible for the accuracy of the return. Fraudulent returns may result not only in the required payment of back taxes but also in penalties and interest.
First-Time Homebuyer Credit

The First-Time Homebuyer Credit, originally passed in 2008 and modified in 2009, provides up to $8,000 for first-time homebuyers. The purchaser, however, must qualify as a first-time homebuyer, which for purposes of this credit means someone who has not owned a primary residence in the past three years. If the taxpayer is married, this requirement also applies to the taxpayer’s spouse. The home purchase must close before Dec. 1, 2009, to qualify, and the credit may not be claimed on the purchaser’s tax return until after the taxpayer closes and has purchased the home.

Different rules apply for homes bought in 2008.

Full details and instructions are available on the official IRS Web site: http://www.irs.gov

Seven Tips for Students with a Summer Job

Many students get a summer job during their time off from school. Here are the top seven things the IRS wants everyone to know about income earned while working a summer job.

1. Taxpayers fill out a W-4 when starting a new job. This form is used by employers to determine the amount of tax that will be withheld from your paycheck. Taxpayers with multiple summer jobs will want to make sure all their employers are withholding an adequate amount of taxes to cover their total income tax liability. To make sure your withholding is correct, visit the

Withholding Calculator on IRS.gov.

2. Whether you are working as a waiter or a camp counselor, you may receive tips as part of your summer income. All tip income you receive is taxable income and is therefore subject to federal income tax.

3. Many students do odd jobs over the summer to make extra cash. Earnings you received from self-employment are subject to income tax. These earnings include income from odd jobs like baby-sitting and lawn mowing.

4. If you have net earnings of $400 or more from self-employment, you will also have to pay self-employment tax. This tax pays for your benefits under the Social Security system. Social Security and Medicare benefits are available to individuals who are self-employed the same as they are to wage earners who have Social Security tax and Medicare tax withheld from their wages. The self-employment tax is figured on Form 1040, Schedule SE.

5. Subsistence allowances paid to ROTC students participating in advanced training are not taxable. However, active duty pay – such as pay received during summer advanced camp – is taxable.

6. Special rules apply to services you perform as a newspaper carrier or distributor. You are a direct seller and treated as self-employed for federal tax purposes if you meet the following conditions:

You are in the business of delivering newspapers.

All your pay for these services directly relates to sales rather than to the number of hours worked.

You perform the delivery services under a written contract which states that you will not be treated as an employee for federal tax purposes.

7. Generally, newspaper carriers or distributors under age 18 are not subject to self-employment tax.

IRS Withholding Calculator
Form 1040 Schedule SE

Make Home Improvements This Summer

Summer is a great time to handle all those home improvements you have been wanting to do. Now is the time with the 2009 energy efficiency tax credits. Under the American Recovery and Reinvestment Act (ARRA) of 2009, the energy tax credit was increased. The new law increases the credit rate to 30 percent of the cost of all qualifying improvements and raises the maximum credit limit to $1,500 for improvements placed in service in 2009 and 2010.

The credit applies to improvements such as adding insulation, energy efficient exterior windows and energy-efficient heating and air conditioning systems.

Note: A similar credit was available for 2007, but was not available in 2008. Homeowners should be aware that the standards in the new law are higher than the standards for the credit that was available in 2007 for products that qualify as "energy efficient" for purposes of this tax credit.

The IRS has issued guidance that will allow manufacturers to certify that their products meet these new standards.

Homeowners may continue to rely on manufacturers' certifications that were provided under the old guidance. For exterior windows and skylights, homeowners may continue to rely on Energy Star labels in determining whether property purchased qualifies for the credit. Manufacturers should not continue to provide certifications for property that fails to meet the new standards.

Further, the Residential Energy Efficient Property Credit is a nonrefundable energy tax credit that helps individual taxpayers pay for qualified residential alternative energy equipment, such as solar hot water heaters, geothermal heat pumps and wind turbines. The new law removes some of the previously imposed maximum amounts and allows for a credit equal to 30 percent of the cost of qualified property.

Top Seven Tips for Taxpayers Starting a New Business

Anyone starting a new business this summer should be aware of their federal tax responsibilities. Here are the top seven things the IRS wants you to know if you plan on opening a new business this year.

First, you must decide what type of business entity you are going to establish. The type your business takes will determine which tax form you have to file. The most common types of business are the sole proprietorship, partnership, corporation and S corporation.

The type of business you operate determines what taxes you must pay and how you pay them.

The four general types of business taxes are income tax, self-employment tax, employment tax and excise tax.

An Employer Identification Number is used to identify a business entity. Generally, businesses need an EIN. Visit IRS.gov for more information about whether you will need an EIN. You can also apply for an EIN online at IRS.gov.

Good records will help you ensure successful operation of your new business. You may choose any recordkeeping system suited to your business that clearly shows your income and expenses.
Except in a few cases, the law does not require any special kind of records. However, the business you are in affects the type of records you need to keep for federal tax purposes.

Every business taxpayer must figure taxable income on an annual accounting period called a tax year. The calendar year and the fiscal year are the most common tax years used.

Each taxpayer must also use a consistent accounting method, which is a set of rules for determining when to report income and expenses. The most commonly used accounting methods are the cash method and an accrual method. Under the cash method, you generally report income in the tax year you receive it and deduct expenses in the tax year you pay them. Under an accrual method, you generally report income in the tax year you earn it and deduct expenses in the tax year you incur them.

Visit the Business section of IRS.gov for resources to assist entrepreneurs with starting and operating a new business.

Starting A Business
Operating A Business
Closing A Business
Publication 4591, Small Business Federal Tax Responsibilities (PDF 470.1K)
Publication 334, Tax Guide for Small Business (PDF 286.2K)
Order Publication 1066C, A Virtual Small Business Tax Workshop DVD

Tax Tips for Recently Married Taxpayers

If you have recently gotten married or plan to get married in the near future, the IRS has some tips to help you avoid stress at tax time.

Notify the Social Security Administration Report any name change to the Social Security Administration, so your name and SSN will match when you file your next tax return. Informing the SSA of a name change is quite simple. File a Form SS-5, Application for a Social Security card at your local SSA office. The form is available on SSA’s Web site at http://www.socialsecurity.gov/, by calling 800-772-1213 or at local offices.

Notify the IRS If you have a new address you should notify the IRS by sending Form 8822, Change of Address. You may download Form 8822 from the IRS website IRS.gov or order it by calling 800–TAX–FORM (800–829–3676).

Notify the U.S. Postal Service You should also notify the U.S. Postal Service when you move so it can forward any IRS correspondence.

Notify Your Employer Report any name and address changes to your employer(s) to ensure receipt of your Form W-2, Wage and Tax Statement after the end of the year.

Check Your Withholding If both you and your spouse work, your combined income may place you in a higher tax bracket. You can use the IRS Withholding Calculator available on IRS.gov to assist you in determining the correct amount of withholding needed for your new filing status. The IRS Withholding Calculator will even provide you with a new Form W-4, Employee's Withholding Allowance Certificate you can print out and give it to your employer so they can withhold the correct amount from your pay.

IRS Withholding Calculator
Form 8822, Change of Address

Summertime Child Care Expenses

Many parents who work or are looking for work must arrange for care of their children under 13 years of age during the school vacation.

Here are five facts the IRS wants you to know about a tax credit available for child care expenses. The Child and Dependent Care Credit is available for expenses incurred during the lazy hazy days of summer and throughout the rest of the year.

The cost of day camp can count as an expense towards the child and dependent care credit.
Expenses for overnight camps do not qualify.

If your childcare provider is a sitter at your home or a daycare facility outside the home, you'll get some tax benefit if you qualify for the credit.

The actual credit can be up to 35 percent of your qualifying expenses, depending upon your income.

You may use up to $3,000 of the unreimbursed expenses paid in a year for one qualifying individual or $6,000 for two or more qualifying individuals to figure the credit.

For more information, including rules for claiming this credit for your spouse or a dependent age 13 or over who is not able to care for himself or herself, check out IRS Publication 503, Child and Dependent Care Expenses. This publication is available on the IRS Web site, IRS.gov or by calling 800-TAX-FORM (800-829-3676).

IRS Publication 503, Child and Dependent Care Expenses (PDF)