The “Tax Holiday” is over! Well we did not perish as we slid over the fiscal cliff, but there are certain tax consequences that we should be aware of for the 2013 year. I want to talk about two things that affect business owners in order for you to plan more easily during the year. The first thing that occurs immediately is that Social Security withholding on all earned income will increase by 2%. This restores the total employee portion of FICA withholding to 7.5%, the same as it was 2 years ago before the “holiday”. For wage earners this will happen with the first paycheck in January. Self- employed people must increase your estimated tax payments by this same additional 2% of net earnings in order to assure that enough money is set aside to pay for the Social Security portion of your 2013 taxes. A good rule of thumb is simply to put 10-15% of every income payment aside in a “tax” account, so that you can be sure of having enough to fund your quarterly estimated tax payments.
Another tax rule, actually two years old but not commonly known, affects business owners who pay independent contractors or freelancers for services. You may need to complete a 1099-Misc. and provide this to people who have done work for you related to your business, rental property, farm or not-for-profit organization and to whom you paid a total of $600.00 or more during the year. This will apply to any entity that is not a corporation in order for you to claim the business expenses on your tax return. For instance if you paid $1000 to someone to build your web site, and this company is not incorporated (Google is incorporated, chances are your neighborhood web designer is not) you will have to provide this person with a 1099-misc. This takes some communication on your part; make sure that your contractor is aware that you will be providing this documentation because not only will your service provider receive this form but the IRS receives a copy of the form too. You must get certain information from the provider such as name and address and Social Security Number or Employer ID Number to include on the form. I recommend that business owners ask anyone you contract with for work (if there is any possibility that it will add up to $600) to fill out a form W-9 (Request for Tax Identification Number) before you pay them, you will then have the information you need to complete the 1099 at the end of the year. Keep the W-9 on file in case you use this contractor again because you only need to request the information once. You must mail these 1099s no later than January 31. There are fines for those who do not provide 1099s and for those who refuse to provide Tax Identification Numbers, and of course, business owners want to claim all expenses allowed by law.