Just to be clear, employees get Form W-2, independent contractors get Form 1099-MISC reporting their income.

Since most of the people visiting this blog are more likely to have independent contractors than employees, we will focus on the Form 1099-MISC for the rest of this post.

Do you need to prepare Form 1099 for anyone in your business?

Basically, you must prepare a 1099 if you paid $600 or more to an individual to perform services for you.  Some examples would be web designers, eBay assistants, virtual assistants, affiliates, accountants, etc.

You should get the name, address and social security number (or Federal EIN) from any person you expect to send a 1099 for.

You need to send copies of the 1099 to the recipient, the IRS and the state tax department.

While you can buy the forms and prepare them manually, I prefer to use an online service called www.FileTaxes.com.

For more help, please read:

Should I File a W-2 or Form 1099?
Instructions for Form 1099-MISC

Related Posts:

• Reporting 1099 Income
• Final Tax Estimate for 2008 Approaching Quickly
• Recovery Rebate Credit for 2008

Here are a few articles you’ll find in this week’s tax carnival:

Pragmaticsage has some advice in Choosing a tax preparer: Do you need a CPA?

Robert D Flach, THE WANDERING TAX PRO of the Web, tells us WHAT NOT TO DO! when searching for a tax pro.

David Weliver says the Retirement Saver’s Tax Credit is a Great Benefit for Low Income Taxpayers, posted at Money Under 30.

FMF from at Free Money Finance lays out The 11 Most Overlooked Tax Deductions.

And finally, our own submission… Kristine McKinley looks at some specific “other” earnings in Are Prizes and Awards Taxable? It’s posted at Ebiz Tax Tips.

Thanks to Kay at Don’t Mess With Taxes for another great tax carnival!

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• Savers Credit Helps Low to Middle Income Taxpayers Save for Retirement
• More About Obama’s Proposed ‘Paycheck Bonus’
• Obama’s Proposed Tax Cuts Total $300 Billion

This estimate goes towards your 2008 tax liability so it reduces the amount you will owe on your 2008 tax return when you file.

To avoid the penalty for not paying enough estimated tax, you need to pay in at least 90% of your 2008 tax liability or 100% of your 2007 tax liability, whichever is less.

Alternatively, you can choose to file and pay your 2008 taxes by January 31, 2009 to avoid any underpayment penalties.

Use Form 1040-ES to submit your estimated tax payment.

For a refresher on estimated tax payments, see ‘Do I Need to Make Estimated Tax Payments?’

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• Savers Credit Helps Low to Middle Income Taxpayers Save for Retirement
• 3rd Quarter Tax Estimates Due Today!
• W-2s and 1099s Due Monday!

The Recovery Rebate Credit is a special one-time benefit that most people received last year in the form of an Economic Stimulus Payment. But people who did not receive the maximum amount of the Economic Stimulus Payment, or whose circumstances have changed, may be eligible now.

In most cases, the IRS will calculate whether a person is eligible and how much of the credit may be due automatically. To allow the IRS to calculate this automatically, simply file your 2008 tax return and follow the “Credit Figured by the IRS” instructions. However, may choose to calculate the Recovery Rebate Credit themselves instead.

In order to calculate the Recovery Rebate Credit, you to know the amount of the Economic Stimulus Payment you received in 2008. If you’re having your tax return prepared by a tax preparer, make sure you give them this info so they can calculate your return correctly.

For more information, please visit Recovery Rebate Credit Is for Individuals Who Missed Last Year’s Economic Stimulus Payment on the IRS website.

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• W-2s and 1099s Due Monday!
• Final Tax Estimate for 2008 Approaching Quickly
• Good Reads: Interesting Tax Posts This Week

Since this is the tax break that will affect most American’s I wanted to share some more details on what is being called Obama’s paycheck bonus (the official name, right now anyway, is the ‘Make Work Pay Credit’.

The details are still being hammered out, but basically it looks like the tax plan will include a payroll tax break that will mean anywhere from $83 to $166 extra per paycheck for workers, during the first quarter of the year.

By reducing payroll taxes, Obama is getting money into the hands of the greatest number of people as quickly as possible.  The hope is that taxpayers will spend this money to help boost the economy.

This tax credit will essentially work out to be $500 a year for individuals and $1,000 for couples, with the full credit being limited to those making $75,000 or less ($150,000 or less for married couples).  People who earn between $75,000 and $85,000 will get a partial credit (the phaseout range for couples is $150,000 to $170,000).

In addition, this will be a refundable tax credit, which means you don’t have to actually owe any tax liability to receive the credit.  This means that lower income families who typically qualify for the child tax credit or earned income credit (and thus may not have any tax liability after the credits are calculated) will still receive the payroll tax credit.

Breaking the numbers down, workers who get paid every two weeks can expect to receive an extra $19.23 per paycheck.  However, it depends on the timing of the tax break.  The tax credit could be implemented during the first quarter of the year (instead of being spread out over the entire year), which would mean larger paychecks during the first part of the year (then normal paychecks once the full credit is received).  According to economists, the earlier American’s receive the credit, the greater the potential impact on the economy, so this it’s very possible we’ll see this tax credit early in 2009.

Remember, this is just a proposal right now, so expect changes before this tax package is finalized.

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• Savers Credit Helps Low to Middle Income Taxpayers Save for Retirement
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• Ask the taxgirl: Girl Scout cookies – In the case of the Girl Scouts, Girl Scouts of the USA is a nonprofit 501(c)(3) organization. The “Cookies from Home” program allows you to pay for the cost of a box of cookies and instead of taking the cookies home and eating them …

Speaking of charitable donations, don’t forget that you must have receipts for all donations in order to deduct them.  This is trickier for non-cash donations, such as clothing given to Goodwill or the Council of the Blind.  Here’s a valuation-guide you can use to help you assign values to your non-cash donations.

• Don’t Mess With Taxes: Fun tax season ahead for free filers – Software companies a step ahead: My first thought upon hearing of this option is that it could work nicely for folks who aren’t eligible for Free File, but who buy their own tax software. Some of them, including me, don’t e-file because .

It’s important to note that the free efile program only provides the forms for taxpayers, it does not calculate your taxes like a tax software program does, so you still have to know how to complete the forms.  But for taxpayers who have simple returns, this could be very helpful.

• Delinquent Taxpayers Get Sympathy from an Unexpected Source – Settling tax debts is not necessarily high on the list of taxpayers struggling to keep their homes and who may have lost their jobs. Delinquent taxpayers are, however, getting a little bit of sympathy… from the IRS. …

As taxgirl says, I’m not sure how much help this will be for taxpayers who are fighting to keep their homes but it’s nice to see a friendlier IRS in this tough economy.

Related Posts:

• W-2s and 1099s Due Monday!
• Final Tax Estimate for 2008 Approaching Quickly
• Recovery Rebate Credit for 2008

In an earlier post, I asked ‘How Will Obama’s Tax Plan Affect Self Employed Americans?’.  Well, more details are emerging as Obama proposes $300 Billion in tax cuts.

Presidential Elect Obama is working with Congress on a tax cut proposal that would make up about 40% of a $775 billion economic stimulus package.

Cuts would be aimed at both individuals and businesses.  At the moment, these are just proposals, but here’s what’s being discussed so far:

• The largest piece of the tax relief package is a payroll tax break of $500 for individuals and $1,000 for couples aimed at low- and moderate-income workers.  I’m wondering if this will also apply to self employed people, but am unsure of the answer so far.
• Relief for businesses include a provision that would allow companies to write off huge losses incurred last year, as well as any losses from 2009, to retroactively reduce tax bills dating back five years.  While businesses would have been able to claim most of the tax write-offs on future tax returns anyway, the proposal accelerates those write-offs to make them available in the current tax season.  This will help companies who are experiencing cash flow problems due to credit being unavailable.
• The Obama plan also proposes to increase the Section 179 deduction up to $250,000 in 2009 and 2010. Currently, the limit is $175,000.  This probably won’t help most small businesses, but those that are expanding or need new equipment will benefit.
• Finally, businesses that create jobs here in the US or avoid future layoffs would receive a tax credit.  Hopefully this will reduce the amount that unemployment is expected to rise in 2009.

While I like the idea of the payroll tax credit, it really needs to apply to self employed people as well.  I’ve heard rumors that self employed people may get to reduce their 1st quarter estimated tax payment, and will confirm or deny as soon as more details become available.

Remember these are just proposals right now.  There will be lots of debate and changes before the final bill is approved.

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• More About Obama’s Proposed ‘Paycheck Bonus’
• Savers Credit Helps Low to Middle Income Taxpayers Save for Retirement
• Year End Tax Tips

According to the IRS, awards, prizes, contest winnings and gambling proceeds (including lotteries) are taxable income which must be reported on Form 1040.  Which means if I am lucky enough to win the gorgeous HGTV Dream Home in Sonoma California, then I have to come up with the money to pay taxes on the value of the home and other prizes included.  Bummer, huh?

If you win a cash prize, such as gambling winnings or the lottery, sure it’s a bummer to pay the taxes, but at least you have the cash to do so.

When you win a non-cash prize, such as a vacation, a new car, or a house (such as in the case of the HGTV Dream Home Giveaway), then paying the taxes is an even bigger challenge because you have to come up with the cash to do so.

For many people it’s difficult to come up with the cash needed to pay for a non-cash prize and as a result they have to sell the prize just to pay the taxes.  This has been true for every winner of the HGTV Dream Home so far (this is the 11th year they have held this giveaway).  The value of the homes given away are usually in excess of $1 million, so you can see why someone would have difficulty paying the taxes without selling the house.  Unfortunately, I would be in the same boat, but I sure would enjoy vacationing in the house before I sell it!

Bottom line, if you are lucky enough to win a prize or award, whether it’s cash or non-cash, just be aware that you will have to include the value of that award in your taxable income, and you will have to come up with the cash to pay those taxes.  Prizes and awards are reported as Miscellaneous Income on line 21 of Form 1040; the taxes will depend on what tax bracket you fall into.  If the prize or award is substantial it could push you into a higher tax bracket (for example a senior citizen who’s only income is Social Security is usually in the lowest tax bracket, but a $50,000 jackpot at the casino could push her into the 15% tax bracket and cause some of her Social Security to be taxable).

One final note: if you have gambling winnings, you are allowed to deduct losses up to the amount of your winnings as a miscellaneous deduction on Schedule A – Itemized Deductions.

Related Posts:

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• W-2s and 1099s Due Monday!
• Tax Carnival 46 – Inauguration Day

The effect of these adjustments is that the tax brackets widen (so you can earn more income before you jump into the next tax bracket).

Here are a few of the changes in effect for 2009:

• The personal and dependency exemption, available to most taxpayers, increased $150 to $3,650.
  
• The new standard deduction is $11,400 for married couples filing a joint return (up $500), $5,700 for singles and married individuals
  filing separately (up $250) and $8,350 for heads of household (up $350). Nearly two out of three taxpayers take the standard deduction, rather than itemizing deductions (itemized deductions include mortgage interest, charitable contributions and state and local taxes).
• Tax-bracket thresholds increased for each filing status. For a married couple filing a joint return, for example, the taxable-income
  threshold separating the 15-percent bracket from the 25-percent bracket is $67,900, up from $65,100 in 2008.
• The maximum earned income tax credit for low and moderate income workers and working families with two or more children is $5,028, up from $4,824. The income limit for the credit for joint return filers with two or more children is $43,415, up from $41,646.

The amount you can contribute to retirement plans also increases for 2009:

• The amount you can contribute to your 401K or 457 plan is increasing $1,000 to $16,500
• The limitation for Simple IRA accounts is increased from $10,500 to $11,500
• The limitation for IRAs and Roth IRAs is the same as 2008: $5,000, plus a $1,000 catch up contributions for taxpayers age 50 and over

For other changes, including the income limitation for taxpayers who qualify for the retirement savings credit, please visit the IRS website.

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There have been many changes to the tax law this year so you may not even be aware of all the tax credits and deductions that you may qualify for.  Here are some tax planning strategies that you may be able to take advantage of before the year ends:

Real Estate Tax Deduction — New for 2008, there is an additional standard deduction for those who don’t itemize their deductions, but who pay real estate taxes. The additional deduction amount is equal to the amount of real estate taxes paid up to $500 for single filers or up to $1,000 for joint filers. This deduction is available for the 2008 and 2009 tax years and increases your standard deduction.

First-Time Homebuyers Tax Credit — First-time homebuyers may qualify for a new tax credit available for a limited time. The credit applies to primary home purchases between April 9, 2008, and June 30, 2009.  The credit is 10 percent of the purchase price of the home, with a maximum available credit of $7,500 for either a single taxpayer or a married couple filing jointly. This tax credit is more of a loan than a credit in that it must be paid back in equal payments over 15 years. First-time homebuyers are those who have not owned a home in the three years prior to a purchase.

Tuition and Fees Deduction — While this isn’t a new deduction, it was scheduled to expire in 2007 and was recently extended for 2008.  This deduction allows you to deduct qualified tuition and required enrollment fees up to $4,000 that you pay for yourself, your spouse or a dependent. You do not have to itemize to take this deduction. However, a taxpayer cannot take both the tuition and fees deduction and education credits (Hope & Lifetime Learning
Credits) for the same student in the same year. Income limits and other special rules apply to each of these provisions.

Educators’ Out of Pocket Expense Deduction — The educator expense deduction allows teachers and other educators to deduct the cost of books, supplies, equipment and software used in the classroom.  Eligible educators include those who work at least 900 hours during a school year as a teacher, instructor, counselor, principal or aide in a public or private elementary or secondary school. Worth up to $250, the educator expense deduction is available whether or not the educator itemizes deductions on Schedule A.

New Rules for “Cash” Charitable Contributions — Just a reminder that the rules for charitable donations have changed.  Since tax year 2007, to deduct any charitable donation of money, you must have a bank record, credit card statement or a written communication from the recipient showing the name of the organization and the date and amount of the contribution. In determining what may be deducted as a charitable contribution, see IRS Publication 526 for 2008 to be released in the near future.

Planning Your Income — Some taxpayers, such as the self-employed, may have some discretion regarding when they receive income. Properly deferring income until next year can lower your taxable income and tax bill this year. This strategy will, however, raise your tax bill next year. And many taxpayers also have some control over their income via the sale of investments to incur a gain or loss.  This is generally a key area of decision-making for investors. These decisions must be made and executed by Dec. 31 to be counted on a 2008 tax return.

Retirement Savings — While you have until April 15 to make contributions to your IRA for 2008, Dec. 31 is the deadline for contributions to a
401(k) plan and other employer sponsored retirement plans.

New children — If you had or adopted a child in 2008, you need to get a Social Security number for that child as soon as possible to ensure that you can include the child as a dependent on your 2008 return. Also, having or adopting a child in 2008 may mean you will receive a larger recovery rebate credit.  You can claim the higher rebate credit when you file your 2008 tax return.

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