ROR Tax Professionals

Audit Alert!

The IRS is stepping up its audits of self-employed taxpayers, so you’ll want to make sure your record keeping is accurate if you own your own business. We’ve identified some areas that have been targeted in the past during their audits to help you avoid the dreaded letter from the IRS.

• Mileage Records In order to claim the standard mileage deduction for business use of your vehicle, the IRS says you must maintain a contemporaneous record of how much you drive. It’s best to record not only the miles you drive, but also the date and business destination you’re driving to.
• Hobby vs. Business If you are reporting income from a hobby, you can only claim deductions for expenses up to the amount of income earned through that activity. A business, on the other hand can deduct expenses in excess of its earnings. To be a business, there must be a profit motive, and the IRS lists nine factors you can use to determine whether you’re engaged in your favorite activity for profit. A simple way to see if you’re O.K. filing as a business is to use the Three-years-of-profit-test. The IRS normally assumes an activity has a profit motive if it has been profitable for three out of the last five years.
• Employee Classification Most business owners are aware of the tax benefits of paying an employee as an independent contractor. Mainly, you don’t have to pay employment taxes, or withhold income taxes on wages earned by an independent contractor. There are nine factors, which can be found on the IRS website, that are used to determine whether you have employees or independent contractors. Remember, if you incorrectly classify an employee as an independent contractor, you can be held liable for employment taxes for that worker, plus a penalty.

Also, make sure your employee payroll is being done correctly to avoid any payroll tax issues and don’t forget, you must issue 1099’s for any independent contractors that you pay more than $600 by January 31st. If you need help with either of these issues, make sure you contact us. We can help you find a payroll service or issue your 1099’s in January.