Filing an Amended Tax Return: What You need to Know
If you discover a mistake on your tax return after you've already filed, don't panic. In most cases, all you have to do is file an amended tax return. Here's what you need to know.
Taxpayers should use Form 1040X, Amended U.S. Individual Income Tax Return, to file an amended (corrected) tax return. An amended tax return should only be filed to correct errors or make changes to your original tax return. For example, you should amend your return if you need to change your filing status or correct your income, deductions or credits.
An amended return cannot be e-filed. You must file the corrected tax return on paper. If you need to file another schedule or form, don't forget to attach it to the amended return.
Taxpayers filing Form 1040X in response to an IRS notice, should mail it to the address shown on the notice.
You normally do not need to file an amended return to correct math errors because the IRS automatically makes those changes for you. Also, do not file an amended return because you forgot to attach tax forms, such as W-2s or schedules. The IRS normally will mail you a request asking for those.
If you are amending more than one tax return, prepare a separate 1040X for each return and mail them to the IRS in separate envelopes. Note the tax year of the return you are amending at the top of Form 1040X. You will find the appropriate IRS address to mail your return to in the Form 1040X instructions.
If you are filing an amended tax return to claim an additional refund, wait until you have received your original tax refund before filing Form 1040X. Amended returns take up to 16 weeks to process. You may cash your original refund check while waiting for the additional refund.
If you owe additional taxes file Form 1040X and pay the tax as soon as possible to minimize interest and penalties on unpaid taxes. You can use IRS Direct Pay to pay your tax directly from your checking or savings account.
Generally, you must file Form 1040X within three years from the date you filed your original tax return or within two years of the date you paid the tax, whichever is later. For example, the last day for most people to file a 2016 claim for a refund is April 15, 2020. Special rules may apply to certain claims. Please call the office if you would like more information about this topic.
You can track the status of your amended tax return for the current year three weeks after you file. You can also check the status of amended returns for up to three prior years. To use the "Where's My Amended Return" tool on the IRS website, just enter your taxpayer identification number (usually your Social Security number), date of birth and zip code. If you have filed amended returns for more than one year, you can select each year individually to check the status of each.
Don't hesitate to call if you need assistance filing an amended return or have any questions about Form 1040X.
How the Sharing Economy Affects Your Taxes
If you've ever used--or provided services for-- Uber, Lyft, Airbnb, Etsy, Rover, or TaskRabbit. then you're a member of the sharing economy and it could affect your taxes. The good news is that if you've only used these services (and not provided them), then there's no need to worry about the tax implications.
However, if you've rented out a spare room in your house through a company like Airbnb then you need to be aware of the tax consequences. You may not realize that the extra income you're making could impact your taxable income--especially if you have a full-time job with an employer. That extra income is taxable even when the activity is cash only or is a part-time "side gig" and it could turn into a tax liability if you're not careful.
To avoid surprises at tax time, it's more important than ever to be proactive in understanding the tax implications of your new sharing economy gig and seek the advice of a competent tax professional.
If you have a job with an employer make sure your withholding reflects any extra income derived from your side gig (e.g. boarding pets at your home through Rover or driving for a ride-share company like Uber on weekends). Use Form W-4, Employee's Withholding Allowance Certificate, to make any adjustments and submit it to your employer who will use it to figure the amount of federal income tax to be withheld from pay.
New Business Owner
While you may not necessarily think of yourself as a newly self-employed business owner, the IRS does. So, even though you work through a company like Airbnb or Rover, you are considered a business owner and are responsible for your own taxes (including paying estimated taxes if you need to). It's up to you to keep track of income and expenses--and of course, to keep good records that substantiate your income and expenses (more on this below).
If you receive income from a sharing economy activity, it's generally taxable even if you don't receive a Form 1099-MISC, Miscellaneous Income, Form 1099-K, Payment Card and Third Party Network Transactions, Form W-2, Wage and Tax Statement, or some other income statement.
And now, for the good news. As a business owner, you are entitled to certain deductions (subject to special rules and limits) that you cannot take as an employee. Deductions reduce the amount of rental income that is subject to tax. You might also be able to deduct expenses directly related to enhancements made exclusively for the comfort of your guests. For instance, if you rent out a room in your apartment through Airbnb, amounts you spend on window treatments, linens, or even a bed, could be deductible. If you drive for Uber and use your personal vehicle you may be able to take the standard business mileage rate, which in 2019, is 58 cents per mile.
Pitfalls: It's more complicated than it seems
At first glance renting out a spare room through Airbnb or pet sitting through Rover seems like an easy thing to do, but as with most things, it's more complicated than it seems and you'll need to keep an eye out for the following pitfalls:
Special Tax Rules for Renting out your Home
- Insurance requirements
- Business license registration (state or municipal)
- Room and lodging, or tourist taxes
Many municipalities charge room, occupancy, or tourist taxes on the amount of rental paid for short term stays (less than 30 days). Noncompliance may result in penalties, fees, and payment of back taxes owed.
- Estimated Tax Payments
Failure to set aside money for taxes and/or estimated tax payments is common, especially under tax reform. The U.S. tax system is pay as you go, which means taxes must be paid as income is earned during the year, referred to as estimated tax payments. Estimated tax payments apply toward both income tax and self-employment tax (Social Security and Medicare).
If you don't pay enough tax, through either withholding or estimated tax (or a combination of both) you may have to pay a penalty. Estimated tax payments are due quarterly. The payment of estimated tax for the income for the first quarter of the calendar year (that is, January through March) is due on April 15. Payments for subsequent quarters are generally due on June 15, September 15 and January 15. Please visit the Tax Due Dates for applicable dates this year. If you don't pay enough by these dates you may be charged a penalty even if you're due a refund when you file your tax return.
If you also work as an employee, you can often avoid needing to make estimated tax payments by having more tax withheld from your paycheck.
- Tax Withholding
Taxpayers involved in the sharing economy who are employees at another job can often avoid making estimated tax payments by having more tax withheld from their paychecks. Don't hesitate to call the office if you need assistance figuring out your withholding and filing a new W-4 with your employer to request the additional withholding.
- Forms 1099-MISC or 1099-K
As a sole proprietor, you may receive a Form 1099-MISC (employees receive a Form W-2) or a 1099-K. Form 1099-K, Payment Card and Third Party Network Transactions, is an information return that reports the gross amount of reportable payment card and third party network transactions for the calendar year to you and the IRS. If you receive a Form 1099-K, you should retain it and use the information reported on the Form 1099-K in conjunction with your other tax records to determine your correct tax. Even if you didn't receive one from the company you provide services for (Lyft, Uber, Airbnb, etc.), the IRS might have, so make sure you report that income on your return.
If you rent your home out for 15 days or more during a calendar year and you receive rental income for the use of a house or an apartment, including a vacation home, that rental income must be reported on your return in most cases. You may deduct certain expenses such as mortgage interest, real estate taxes, maintenance, utilities, and insurance and depreciation, which reduce the amount of rental income that is subject to tax.
If you use the dwelling unit for both rental and personal purposes, you generally must divide your total expenses between the rental use and the personal use based on the number of days used for each purpose. You won't be able to deduct your rental expense in excess of the gross rental income limitation.
Generally, if you rent out your home for less than 15 days, then you do not need to report any of the rental income and you don't deduct any expenses as rental expenses.
It's important to keep good records and to choose a recordkeeping system suited to your business that clearly shows your income and expenses. The type of records you need to keep for federal tax purposes depends on what kind of business you operate; however, at a minimum, your recordkeeping system should include a summary of your business transactions (i.e. income and expenses) using a cash basis of accounting. Your records must also show your gross income, as well as your deductions and credits.
Tax Rules are Complicated: Don't get Caught Short
If you have any questions or would like more information about the sharing economy and your taxes, please contact the office.
Choosing a Legal Entity for Your Business
If you've decided to start a business, one of the most important decisions you'll need to make is choosing a legal entity. It's a decision that impacts many things--from the amount of taxes you pay to how much paperwork you have to deal with and what type of personal liability you could face. Even if you've been in business for a number of years, it's a good idea to periodically reevaluate your business structure because, as we all know, tax laws can change and that business entity you chose when you first started out may not be the best option ten years later. For example, if you operate your business as a sole proprietor, you must pay a self-employment tax rate of 15% in addition to your individual tax rate; however, if you were to revise your business structure to become a corporation and elect S-Corporation status you could take advantage of a lower tax rate thanks to tax reform.
Forms of Business
The most common forms of business are Sole Proprietorships, Partnerships, Limited Liability Companies (LLC), and Corporations. Federal tax law also recognizes another business form called the S-Corporation. While state law controls the formation of your business, federal tax law controls how your business is taxed.
What to Consider
Businesses fall under one of two federal tax systems and the first major consideration in choosing the form of doing business is whether to choose an entity that has two levels of tax on income or a pass-through entity that has only one level directly on the owners:
1. Taxation of both the entity itself on the income it earns and the owners on dividends or other profit participation the owners receive from the business. C-Corporations fall under this system of federal taxation.
2. "Pass through" taxation. The entity (called a "flow-through" entity) is not taxed, but its owners are each taxed (more or less) on their proportionate shares of the entity's income. Pass-through entities include:
- Sole Proprietorships
- Partnerships, of various types
- Limited liability companies (LLCs)
- "S-Corporations" (S-Corps), as distinguished from C-corporations (C-Corps)
The second consideration, which has more to do with business considerations rather than tax considerations, is the limitation of liability (protecting your assets from claims of business creditors).
Let's take a general look at each of the options more closely:
Types of Business Entities
The easiest (and most common) form of business organization is the sole proprietorship, which is defined as any unincorporated business owned entirely by one individual. A sole proprietor can operate any kind of business (full or part-time) as long as it is not a hobby or an investment. In general, the owner is also personally liable for all financial obligations and debts of the business.
If you are the sole member of a domestic limited liability company (LLC), you are not a sole proprietor if you elect to treat the LLC as a corporation.
Types of businesses that operate as sole proprietorships include retail shops, farmers, large companies with employees, home-based businesses and one-person consulting firms.
As a sole proprietor, your net business income or loss is combined with your other income and deductions and taxed at individual rates on your personal tax return. Because sole proprietors do not have taxes withheld from their business income, you may need to make quarterly estimated tax payments if you expect to make a profit. As a sole proprietor, you must also pay self-employment tax on the net income reported.
A partnership is the relationship existing between two or more persons who join to carry on a trade or business. Each person contributes money, property, labor or skill, and expects to share in the profits and losses of the business.
There are two types of partnerships: Ordinary partnerships, called "general partnerships," and limited partnerships that limit liability for some partners but not others. Both general and limited partnerships are treated as pass-through entities under federal tax law, but there are some relatively minor differences in tax treatment between general and limited partners.
For example, general partners must pay self-employment tax on their net earnings from self-employment assigned to them from the partnership. Net earnings from self-employment include an individual's share, distributed or not, of income or loss from any trade or business carried on by a partnership. Limited partners are subject to self-employment tax only on guaranteed payments, such as professional fees for services rendered.
Partners are not employees of the partnership and do not pay any income tax at the partnership level. Partnerships report income and expenses from its operation and pass the information to the individual partners (hence the pass-through designation).
Because taxes are not withheld from any distributions partners generally need to make quarterly estimated tax payments if they expect to make a profit. Partners must report their share of partnership income even if a distribution is not made. Each partner reports his share of the partnership net profit or loss on his or her personal tax return.
Limited Liability Companies (LLC)
A Limited Liability Company (LLC) is a business structure allowed by state statute. Each state is different, so it's important to check the regulations in the state you plan to do business in. Owners of an LLC are called members, which may include individuals, corporations, other LLCs and foreign entities. Most states also permit "single member" LLCs, those having only one owner.
Depending on elections made by the LLC and the number of members, the IRS treats an LLC as either a corporation, partnership, or as part of the LLC's owner's tax return. A domestic LLC with at least two members is classified as a partnership for federal income tax purposes unless it elects to be treated as a corporation.
An LLC with only one member is treated as an entity disregarded as separate from its owner for income tax purposes (but as a separate entity for purposes of employment tax and certain excise taxes), unless it elects to be treated as a corporation.
In forming a corporation, prospective shareholders exchange money, property, or both, for the corporation's capital stock. A corporation conducts business, realizes net income or loss, pays taxes and distributes profits to shareholders.
A corporate structure is more complex than other business structures. When you form a corporation, you create a separate tax-paying entity. The profit of a corporation is taxed to the corporation when earned and then is taxed to the shareholders when distributed as dividends. This creates a double tax.
The corporation does not get a tax deduction when it distributes dividends to shareholders. Earnings distributed to shareholders in the form of dividends are taxed at individual tax rates on their personal tax returns. Shareholders cannot deduct any loss of the corporation.
If you organize your business as a corporation, generally are not personally liable for the debts of the corporation, although there may be exceptions under state law.
An S-corporation has the same corporate structure as a standard corporation; however, its owners have elected to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes. Shareholders of S corporations generally have limited liability.
Generally, an S-Corporation is exempt from federal income tax other than tax on certain capital gains and passive income. It is treated in the same way as a partnership, in that generally, taxes are not paid at the corporate level. S-Corporations may be taxed under state tax law as regular corporations, or in some other way.
Shareholders must pay tax on their share of corporate income, regardless of whether it is actually distributed. Flow-through of income and losses is reported on their personal tax returns and are assessed tax at their individual income tax rates, allowing S-Corporations to avoid double taxation on the corporate income.
S-corporation owners can choose to receive both a salary and dividend payments from the corporation (i.e., distributions from earnings and profits that pass through the corporation to you as an owner, not as an employee in compensation for your services). Dividends are taxed at a lower rate than self-employment income, which lowers taxable income. S-corp owners also save on Social Security and Medicare taxes because their salary is less than it would be if they were operating a sole proprietorship, for instance.
Furthermore, as a corporation, profits and losses are allocated between the owners based on the percentage of ownership or number of shares held. If the S-corporation loses money, these losses are deductible on the shareholder's individual tax return. Here's an example: If you and another person are the owners and the corporation's losses amount to $20,000, each shareholder is able to take $10,000 as a deduction on their tax return.
To qualify for S-Corporation status, the corporation must meet a number of requirements. Please call if you would like more information about which requirements must be met to form an S-Corporation.
When making a decision about which type of business entity to choose each business owner must decide which one best meets his or her needs. One form of business entity is not necessarily better than any other and obtaining the advice of a tax professional is critical. If you need assistance figuring out which business entity is best for your business, don't hesitate to call.
Recordkeeping Tips for Small Business Owners
The key to avoiding headaches at tax time is keeping track of your receipts and other records throughout the year. Whether you use an excel spreadsheet, an app, an online system or keep your receipts organized in a folding file organized by month, good record-keeping will help you remember the various transactions you made during the year.
Records help you document the deductions you've claimed on your return. You'll need this documentation should the IRS select your return for audit. Normally, tax records should be kept for three years, but some documents - such as records relating to a home purchase or sale, stock transactions, IRA, and business or rental property - should be kept longer.
In most cases, the IRS does not require you to keep records in any special manner. Generally speaking, however, you should keep any and all documents that may have an impact on your federal tax return including but not limited to:
- Credit card and other receipts
- Mileage logs
- Canceled, imaged, or substitute checks or any other proof of payment
- Any other records to support deductions or credits you claim on your return
Good record-keeping throughout the year saves you time and effort at tax time. For more information on what kinds of records you should keep or assistance on setting up a recordkeeping system that works for you, please call the office.
Employers: Backup Withholding Lowered to 24 Percent
Small business owners are reminded that tax reform legislation lowered the backup withholding tax rate to 24 percent. In addition, the withholding rate that usually applies to bonuses and other supplemental wages was also lowered to 22 percent. As such, employers should have their employees check their withholding.
Backup withholding. Under the Tax Cuts and Jobs Act (TCJA) of 2017, the backup withholding tax rate dropped from 28 percent to 24 percent. This new rate was effective on January 1, 2018.
Backup withholding applies in various situations, including when a taxpayer fails to supply their correct taxpayer identification number (TIN) to a payer. Usually, a TIN is a Social Security number (SSN), but in some instances, it can be an employer identification number (EIN), individual taxpayer identification number (ITIN) or adoption taxpayer identification number (ATIN).
Backup withholding also applies (following notification by the IRS) where a taxpayer under-reported interest or dividend income on their federal income tax return. When backup withholding applies, payers must backup withhold tax from payments not otherwise subject to withholding. This includes most payments reported on IRS Form 1099, such as interest, dividends, payments to independent contractors and payment card and third-party network transactions.
Payees may be subject to backup withholding if they:
- Fail to give a TIN,
- Give an incorrect TIN,
- Supply a TIN in an improper manner,
- Under-report interest or dividends on their income tax return, or
- Fail to certify that they’re not subject to backup withholding for under-reporting of interest and dividends.
To stop backup withholding, the payee must correct any issues that caused it. They may need to give the correct TIN to the payer, resolve the under-reported income and pay the amount owed, or file a missing return. Please call if you need more information about backup withholding.
Payers report any backup withholding on Form 945, Annual Return of Withheld Federal Income Tax. Forms 945 are generally due to the IRS by January 31. Payers also show any backup withholding on information returns, such as Forms 1099, that they furnish to their payees and file with the IRS.
Bonuses and other supplemental wages. The TCJA also lowered the tax withholding rates to 22 percent. This rate normally applies to bonuses, back wages, payments for accumulated leave and other supplemental wages. In most cases, the new rate was effective on January 1, 2018. Please note that for payments exceeding $1 million, the rate is 37 percent.
If you have any questions about tax withholding rates, please don't hesitate to contact the office today.
Tax Tips for Students With a Summer Job
Are you a student with a summer job or the parent of a student with a summer job? Here are seven things you should know about the income earned by students during the summer months.
- All new employees 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 the withholding is correct, don't hesitate to call.
- Whether you are working as a waiter, valet, or a camp counselor, you may receive tips as part of your summer income. You should be aware that tips are considered taxable income and subject to federal income tax. Employees should keep a daily log to accurately report tips and they must report cash tips to their employer for any month that totals $20 or more.
- From pet sitting to mowing lawns and pulling weeds, many students do odd jobs over the summer to make extra cash. If this is your situation, keep in mind that the earnings you receive from self-employment are subject to income tax.
- While some students may earn too little from their summer job to owe income tax, employers usually must still withhold Social Security and Medicare taxes from their pay. This tax pays for your future benefits under the Social Security system.
- Net earnings of $400 or more from self-employment is taxable, as is church employee income of $108.28 and is reported on Form 1040, Schedule SE. Social Security and Medicare benefits are available to individuals who are self-employed just as they are to wage earners who have Social Security tax and Medicare tax withheld from their wages.
- 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.
- Special rules apply to services you perform as a newspaper carrier or distributor. Please call the office if you'd like more information about this.
Summer work for students can be a patchwork of odd jobs, which makes for confusion at tax time. Don't hesitate to call if you have any questions at all about income earned from a summer job.
Tax Due Dates for June 2019
Employees who work for tips - If you received $20 or more in tips during May, report them to your employer. You can use Form 4070.
Individuals - If you are a U.S. citizen or resident alien living and working (or on military duty) outside the United States and Puerto Rico, file Form 1040 and pay any tax, interest, and penalties due. U.S. citizens living in the U.S. should have paid their taxes on April 15. If you want additional time to file your return, file Form 4868 to obtain 4 additional months to file. Then file Form 1040 by October 15. However, if you are a participant in a combat zone, you may be able to further extend the filing deadline.
Individuals - Make a payment of your 2019 estimated tax if you are not paying your income tax for the year through withholding (or will not pay enough tax that way). Use Form 1040-ES. This is the second installment date for estimated tax in 2019.
Corporations - Deposit the second installment of estimated income tax for 2019. A worksheet, Form 1120-W, is available to help you estimate your tax for the year.
Employers - Nonpayroll withholding. If the monthly deposit rule applies, deposit the tax for payments in May.
Employers - Social Security, Medicare, and withheld income tax. If the monthly deposit rule applies, deposit the tax for payments in May.
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