Back-up Withholding

So, you’re a contractor and you hire a bunch of contractors. You need to get W-9’s from them with their social security numbers or EIN’s. So, you do that, but let’s say, they give you false numbers. When you file their 1099’s, the IRS may contact you saying that you need to back-up withhold 24% from their gross payments.

DON’T IGNORE THAT LETTER. Failure to do that incurs liability for your company to the extent of the back-up withholding. Now if you’re lucky, the offending contractor actually paid their taxes and reported the income. If so, then you have a defense that the IRS cannot collect a tax twice. But if they didn’t you’re likely to face a pretty big liability.

And if these guys want their 24% back, they can always file a tax return and get it back. Most won’t, because 24% is less than what they really owe.

No Tax Holiday’s Yet

The IRS has NOT issued any guidance allowing for late filing or payment. We are waiting to see if there was anything in the newly passed COVAD relief bill once it is passed. Neither Virginia nor DC have allowed extensions for any taxes as yet. That means despite pledges to assist small businesses, Sales Tax filings, Withholding tax filings, and payments will all be due as usual. Remember that intentional failure to pay withholding tax liabilities or sales tax liabilities creates personal liabilities to those making that decision be they owners, or employees. It does not matter if the business is a limited liability company or a corporation, the liability attaches if you prefer other creditors to the tax authorities. So, don’t ignore or put off those obligations.

New Tax Act passed

I’ve been waiting on Congress to do its job and finally some legislation has come through. There is something in the new Tax Act for everyone.
First, the highlights:
The tax benefits of the 2001, 2003 Tax Acts were extended for two years. This means that the tax rates for 2010 will hold for two more years including on capital gains. With regard to Alternative Minimum Taxes, the relief is in the Act. So, there will not be a jump in people affected by AMT next year.

With regard to Estate and Gift Taxes two huge changes.
(1) Reunification of Gift and Estate tax exemptions. Since 2001, gift tax exemption was capped at $1 Million. Now it will be the same as the estate tax exemption of $5 Million.
(2) Estate tax unified credit increased to $5 Million for years beginning in 2011. There is also a retroactive election for 2010 relating to step-up in basis. If the estate is under $5 Million, it would appear that the one can elect to step-up the basis of the assets. If its above $5 Million we’ll need to assess your personal situation to decide whether you want to pay estate tax to get a step-up in basis. The rate will stay at the current 35% rate for estates over $5 Million. There is also portability for married couples. This means that if one spouse dies after December 31, 2010 and the other dies later and the first spouse used up $3 Million of his or her credit amount, the second spouse can take up to $7 Million of the first spouse’s unused credit. Given the limited period of this law, it might be wise to look at gifts, although there is a basis trade-off if that occurs. Either way, its a huge change in the law.
These changes are only for two years. So, after December 31, 2012, the exemption amount falls back to $1 Million and estate tax rate to 55%.

With regard to the 2% payroll tax holiday for 2011, it also applies to self-employed individuals.

Energy Efficient Home Credit is extended to through 2011. Energy efficient appliances credit is extended through 2011 as well. Credits for windows, wood stoves, water heaters will continue.

Deductions for school teachers shall be continued through 2011. Sales tax deduction continued through 2012. Tax free distributions to charities from retirement plans extended through 2011.
Lots of continuation of popular business credits, research credit, and other industry specific credits.

Postscript

While he escaped ruinous personal liability that could have stayed with him his entire life, it was a costly less for Ben. His business was ruined and would have to liquidate the debts were too much. He had expended tens of thousands of dollars on attorneys to get him out of his predicament. He now had a mortgage on his house when he was debt free. At 60 years old, he had to start all over again, but this time without a partner, and he was determined to keep total control of the checkbook in the future, so that he could ensure that all taxes were paid.

Sam Shadewell sat looking at the Caribbean drinking fruity rum drinks and living the life. He was Manny Rodriguez now thanks to a bribe to a local official, and no one would ever find him.

Where O where did my partner go?

Several hours later, Sam returned and Ben talked to him. “Sam, an IRS agent showed up asking about our withholding taxes and said we haven’t been paying them. I thought all our debts were up to date”. “Must be a computer error”, Sam responded. “I’ll call the guy back, tomorrow after I pull all the records.”

The next day, Sam did not show up for work, but had called in sick. Ben dutifully called the agent to report that Sam was out sick today and would call him upon his return and shared that Sam thought there must be some mistake. “Have him call me soon, so I don’t have to start collection action”. Sam called in for the next few days sounding ill (and no one wants a sick person around food) and Ben kept calling the agent. This went on for about four days. Then, Sam didn’t call one day. Ben called Sam, and the answering machine picked up. “Where are you, Sam? Call me as soon as you get this message.” No call was ever returned. Ben went by Sam’s house that night and found the house empty and no one around. A neighbor saw Ben and came over and said, “Sorry to see Sam leave, he was such a great neighbor”. Ben was dumbstruck.

The next day Ben called the Agent. “My partner has disappeared, I fear he stole some of our money instead of paying you.” “Well, you better get to the bottom of this and soon, or we’ll have to shut down your store”, the agent said. “How far behind are we?” Ben asked. “About two years”, the agent said.

That afternoon, Ben went into the small office looking for the check register and the bank statements, they were gone. He then went to the bank. “May I help you?” the bank officer asked. “Sure, my name is Ben Barnacle, I am an owner of Cakes, Inc., and I need to see a manager or something.” After a few minutes, the branch manager came out and Ben explained his plight. The manager frowned and then said, “Let’s get duplicates of all those bank statements and cancelled checks, we’ll have to charge you to research that”. “No problem”, said Ben, “I was afraid it was all hopeless.” “It’ll probably take abou t a week to get these to you”, the manager said.

Ben called the Agent back and relayed the missing books and records and told him that he had ordered the bank statements and hoped to get them in about a week. The Agent casually asked him what bank he used, and Ben said, “The Big Huge National Bank on First Street”. Ben figured that by cooperating with the agent he was buying good will. The agent wrote the name of the bank on a piece of paper and stuck it in the file.