Month: January 2024

Got kids?

/ Meghan Birmingham Vangeli / Leave a comment

You may qualify for dependent care credit, but you need to have all the info.

When you brought that little tax credit…er…I mean bundle of joy…home from the hospital, you knew your life was going to change. You now have this tiny, helpless creature that must be supervised and cared for. All. The. Time. At some point in time, it is very likely that you will need to pay someone to care for your offspring while you venture forth to make money in order to house, feed, and clothe this brand new human. If you do so, you may be eligible for something called the Dependent Care Credit1.

What expenses can I claim for this credit? Subject to a few limitations, it is generally any unreimbursed2 payments you make for child care of a dependent under age 13 while you are working3. This can be self-employed work or W-2 employment. Here are a few examples of unreimbursed child care payments that would qualify:

  • Daycare/childcare centers
  • Pre-Kindergarten preschool or nursery school
  • Nanny (household employee)4
  • Day camp
  • Some after-school activities
  • Babysitters

There are a couple providers that specifically do not qualify:

  • Overnight camp
  • Tutoring or other private lessons
  • Transportation to or from care provider (unless transportation is provided by that care provider)
  • Child’s parent or minor sibling5

Great – I paid a ton of money for that. What do I do to get this credit? In order to claim the credit, you need to give your tax preparer the following info on each care provider:

  • Name of provider
  • Provider tax identification number (EIN or SSN)
  • Provider address
  • Care location (if different)
  • Provider phone number
  • Amount paid during the tax year, allocated to each dependent

You noticed the second item – tax ID number. This information is usually listed on the year-end statement provided by most daycare centers, day camps, or other care providers. If you employ a nanny, you should have this from the Form W-4 you collected when you hired them (because you are sending them a W-2, right? <nod with me>). However, if, for example, you paid a neighborhood kid or two to watch your children while you worked, you will need to get a Form W-10 to request the social security number of those providers. If you think you will need a Form W-10, request it as soon as possible.6

I can work with that. How much credit do I get for this? It’s actually a bit disappointing. The credit is figured on a sliding scale based on your modified adjusted gross income. Without getting into a whole bunch of math, I find most people max out this credit at $600 for one qualifying dependent and $1,200 for two or more.7 But, hey, better than nothing. And you never know what those crazy folks in Congress are going to do with the tax code.

So, as you gather up your tax data, be sure to collect those dependent care expenses and all the info that goes with them!

  1. This credit is in addition to the general child tax credit you may be eligible for. ↩︎
  2. Childcare expenses that are reimbursed through an employer’s flexible spending arrangement (“FSA”) are not eligible for this credit. But if you have dependent care expenses in excess of the FSA reimbursement, they can be used to claim this credit. Additionally, your tax preparer needs to report at least the amount of dependent care expenses as you claimed during the tax year. So you still need to give them all this information. ↩︎
  3. This credit is also available for other dependents like disabled parents or disabled older children. However, I am limiting this post to dependent care credit for children under age 13. ↩︎
  4. If you hire a nanny or a related party for child care, there are some additional requirements in order to render these payments eligible for the credit. ↩︎
  5. Seriously, people have tried to pay the other parent to “babysit” their own child. You cannot babysit your own child. It’s called parenting. /rant ↩︎
  6. In the future, it is better to get the Form W-10 from the provider before care commences or payment is made. Also, this does not mean you will be required to issue any sort of Form 1099 to the provider(s). ↩︎
  7. This is calculated based on the tax law in effect at the time of this writing. There is legislation pending in Congress that could alter this and other child-related tax credits. Please consult your tax advisor for the most recent developments. ↩︎

FinWHAT?

/ Meghan Birmingham Vangeli / Leave a comment

AS OF FEBRUARY 18, 2025 THE INJUNCTION THAT WAS PREVIOUSLY IN PLACE HASE BEEN LIFTED. THE FINCEN WEBSITE HAS POSTED A NEW DEADLINE OF MARCH 21, 2025. PLEASE CONSULT YOUR ADVISOR TO ENSURE YOU COMPLETE THIS REGISTRATION IF YOU ARE REQUIRED.

Who the heck is FinCEN and why do I have to register with them?

Ah, the federal government is at it again…coming up with more hoops for us to jump through. I guess Congress needed to do something to earn their compensation. (C’mon, the holidays, the health insurance, the pension…they should actually have to do some work…) Unfortunately, the “work” they do is actually creating more work for some business owners in the form of FinCEN Beneficial Ownership Information reporting.

What is FinCEN? ”FinCEN” is short for Financial Crimes Enforcement Network (the federal government does love their quirky little acronyms). Their mission, as stated on their website, is as follows:

The mission of the Financial Crimes Enforcement Network is to safeguard the financial system from illicit use, combat money laundering and its related crimes including terrorism, and promote national security through the strategic use of financial authorities and the collection, analysis, and dissemination of financial intelligence.

That is a long sentence with a lot of commas. What does it boil down to? They are a federal agency created to prevent money laundering and identify funding of illegal activities like terrorism. In theory, this sounds like a good thing. However, they have cast a wide net in the pursuit of this mission; a lot of plankton will be tangled up in order to catch the whale.

OK, what did they do? FinCEN implemented a program called “Beneficial Ownership Information” or “BOI”. Under this program, most entities formed through the filing of documents with the secretary of state of a US state or territory (or a foreign jurisdiction) now have a legal obligation to file a Beneficial Ownership Information Report with FinCEN. This applies to you if you are…

  • a corporation (Subchapter S or C)
  • a partnership (limited partnerships or other registered partnerships)
  • an LLC (even single-member LLCs)

Well, am I going to have to file? The short answer to that is ‘probably yes’ if you are organized as one of those entities. There a a number of exemptions, but they are pretty specific so most entities are unlikely to qualify for one. FinCEN BOI reporting does not apply if you are an sole proprietor (even with a registered DBA or an EIN) or an unregistered general partnership/joint venture. But if you are a teeny, tiny single-member LLC, you will likely be required to file a BOI report. Additionally, if you reside in a community property state (like Texas), both spouses will need to register even if only one spouse is the named owner.1 (Like I said, a lot of plankton will be tangled up in this.)

What happens if I don’t file? How good do you look in orange? If you fail to file, you risk fines of up to $10,000 and imprisonment up to 2 years. It is not in your best interest to ignore this.

Ok, ok, orange is not my color. When do I have to file this? Soon…

  • If your entity was already in existence and registered with a secretary of state on January 1, 2024, you have until January 1, 2025 to file your initial report. 
  • If your entity was set up on or after January 1, 2024, and before January 1, 2025, you have 90 calendar days to complete and file this BOI report. 
  • On or after January 1, 2025, new entities will have 30 calendar days to comply.

Then, if ANYTHING changes (i.e., you move, the business address changes, there is a name change, there is a change in the ownership of the company, there is a change/expiration to the document you used to register) you must file a corrected report within 30 calendar days or risk the abovementioned penalties for noncompliance. (Is orange still the new black?)

Wow, this is crazy. But I’m sure you’ll stay on top of this for me, right o beloved CPA? Nope. Even though I look fabulous in orange, I prefer a muted coral over…um…federal penitentiary orange. At this time, I am not offering this service. However, I point you in the direction of the FinCEN BOI reporting website right here and an instruction guide here. I am happy to answer questions to the best of my ability, and will send out the occasional reminder as we get closer to the end of the year, but I will not prepare or file these reports on your behalf. If you would like to engage a professional to complete this for you, I suggest you consult your attorney.

I provide this for information and entertainment purposes. It is not meant to be advice for your specific situation. Please consult your attorney or other advisor for assistance with your FinCEN compliance needs.

  1. This is applicable if the entity interest is community property. If, for example, it was acquired through gift or bequest, was owned by one spouse prior to the marriage, or was partitioned as separate property as part of a premarital agreement, it may be considered separate property. Generally, in community property states, the default assumption is that all property is part of the community. So please consult your legal advisor if you think your ownership interest might be considered separate property. Additionally, if you have already registered and did not register your spouse as community property owner, consult your advisor. You may need to update your registration as soon as possible. ↩︎

To 1099 or not to 1099?

/ Meghan Birmingham Vangeli / Leave a comment

If you are an independent contractor (aka “a freelancer”), chances are good that you have been the recipient of a Form 1099-NEC (or several) somewhere along the way. However, did you know that you may be required to file them too? Read on…

Why, you ask, would I need to file such a form?  Well, if you paid any person(s) $600 or more to provide services in the course of your business1 during 2023, you are required to prepare and file Form(s) 1099-NEC2 for them by January 31, 2024.

What do you mean “person”?  Well, a “person” in this circumstance is an individual, sole proprietor, partnership, or LLC that is NOT organized as a corporation.  So, if you paid Frank the Painter, Inc. (an S-Corporation) $700 to paint your rental house, you are off the hook and do not have to send a 1099 to his corporation.  But if you hired Gina Smith, an unincorporated sole proprietor, to repair your rental house plumbing for $600 or engaged Dewey, Cheatham & Howe, LP for $1,000 of legal consulting3 for your self-employed business, you will need to send Gina and/or DC&H a Form 1099-NEC.

What if I paid a guy I found on Craigslist $750 to buy a water heater for my rental?  Do I need to send that guy a 1099-NEC too?  Nope, 1099-NECs are only for service or labor payments, not purchases of goods or equipment. However, if you are issuing a Form 1099 to a contractor who supplied or installed materials and equipment incidental to the services they were providing, then you would include the entire amount of the payment on the Form 1099.

Okay, well what do I need to do to prepare these 1099-NECs?  The first thing is you need to get a Form W-9 from anybody you paid $600 or more during 2023.  (Really, it is better to get the W-9 from anyone your business hires before any work commences or money changes hands…but better late than never.)  This will give you the person’s legal name, current address, taxpayer identification number/social security number, and a confirmation of their federal tax classification (i.e., individual, partnership, corporation, etc.).  Then, if you plan to prepare and file the Forms 1099-NEC yourself, I would take a peek at the IRS Form 1099-NEC filing instructions for some guidance. You can either purchase the special paper 1099 and 1096 forms (no, you can’t download them from the IRS website), fill them out, and mail them in (only permitted if you have 10 or fewer forms to file), or you can use an online service to file them electronically (now required if you have more than 10 Forms 1099-NEC to file).4  Or you can always hire an accountant to help you… <ahem>

So what terrible thing is going to happen if I don’t file Forms 1099-NEC? To be blunt, you will pay penalties and wind up filing them anyway. The IRS hates this, and they have started hating it even more in recent years. If you are supposed to file Forms 1099 and you fail to do so, the IRS deems those Forms 1099 to be late. They then charge late penalties of anything from $60 to $630 per form depending on how late it is. That’s per Form 1099. So if you have 10 Forms 1099-NEC to file, you could be on the hook for up to $6,300 in penalties…and you’ll still have to file the forms. The penalties are severe, so it is really best to get these forms filed timely (that is, by January 31st).

Take a look at your tax records to determine if your business paid anybody $600 or more during 2023. If you did, gather the info and get those Forms 1099-NEC done as soon as possible!

  1. “Business” could mean a trade or business activity (like freelance musician or tax preparer) or a rental activity (like a landlord or an AirBnB host). ↩︎
  2. Yes, Form 1099-NEC. Not Form 1099-MISC. Go back and read my prior post on this. We haven’t been using Form 1099-MISC for “Nonemployee Compensation” since tax year 2019. If you’ve been using Form 1099-MISC for the past three years, well, you’re doing it wrong. ↩︎
  3. There are some special rules for legal fees. Consult your tax advisor if you may have this issue. ↩︎
  4. The IRS has recently unveiled its new online efiling service for information returns like Forms 1099. It’s called the “Information Returns Intake System” or IRIS. So cute…so floral…so, evidently, dysfunctional. Surprisingly (or not), every practitioner I have heard from has had problems with the system locking them out. So, for this year, I would investigate a different filing method (either paper, if eligible, or a commercial efiling service) for your Form 1099 filing needs. ↩︎

I provide this for information or entertainment purposes. It should not be construed as tax advice. Please consult your tax advisor to address your specific tax filing needs.

That’s so gross!

/ Meghan Birmingham Vangeli / Leave a comment

Why do you keep using the word “gross” all the time…?

You’ve probably heard the term “gross receipts” and wondered what that means. No, it’s not cash register tape that’s…like…sticky. (I hate ‘sticky’…) “Gross receipts” is the total amount of compensation you received before any expenses are deducted. Accounting types (like me!) will also refer to this concept as “revenue” or sometimes “gross income”.

This “gross” concept can pop up in different places on your tax return. We might have “gross wages”, which we find on your Forms W-2. Or there’s “gross rents” which is everything you collected from your renters if you have rental properties. However, the place where I see the most confusion with “gross receipts” is with self-employment income.

Gross receipts from self-employment income generally include every dime you receive in the course of doing business. It may be reported to you on Form 1099-NEC. This form is provided to you if you earned $600 or more from any one payer during the tax year. Guess who else this form is provided to…that’s right – the IRS! If you fail to report gross income from Form 1099-NEC on your tax return (likely on Schedule C), you will get a friendly note from the Federal government that includes a bill for the unpaid tax along with interest and penalties to keep it company. That’s generally not something we want to encourage, so we have to make sure to report all that revenue.

But what happens if you don’t receive a Form 1099-NEC? If you earn less than $600 from somebody, that income is not taxable, right? Yeah, no. The reporting threshold for Form 1099 has nothing to do with whether or not the income is taxable. The $200 you earned at that one-off wedding gig? Taxable. The student that pays you $50 a week in cash for private lessons? Taxable. The Zelle or Venmo payments you receive for providing a service to a client? Taxable. Essentially any money you receive in the course of your freelance business is taxable and should be included with your Schedule C gross receipts.1

But, what if you don’t get 1099s from your students and didn’t get them from several of the gigs you played. How are you supposed to figure this out? Well, gentle taxpayer, you must acquaint yourself with the concept of record keeping. You are running a business, so you have to do some work behind the scenes to keep track of this business. You don’t have to get QuickBooks or take accounting classes (been there/done that). But you do need to figure out a system so you can accurately report your income.

So where should you start? Well, there are a couple things you can do to get organized. The first thing I would recommend is to open a checking account for your self-employed business income only. Deposit all your self-employment gross receipts into that account (and nothing else — keep any W-2 wages or other types of income in a separate account). That way, at the end of the year, you can run a report of the business account’s activity and add up all the deposits. You can also use this account to pay business expenses when possible. Whatever is leftover can be transferred into your personal account.

A dedicated bank account is something the IRS loves. They also love a dedicated credit card. If you are a credit card person, designate one as your “business” card and use it only for business expenses. That will make tax time a little easier too.

Finally, to pull it all together, you can look into a budgeting or accounting program like You Need a Budget (“YNAB”) or Xero. This is kinda for extra credit, but it can give you some insight into how much you’ve earned year-to-date (helpful for estimated taxes) and can give you reports at tax time. And, not surprisingly, it can help you set your budget.

  1. Gross rant: If you give me a stack of 1099-NECs and say that’s 100% of your freelance gross income…but I know you teach and I’m pretty sure I played a gig with you that isn’t on a 1099…I will not believe you and will ask again about your total gross receipts. I’ve got liability too…especially if I believe you’re intentionally underreporting your income. That’s also known as “fraud”. The IRS preparer penalties for me if you (we) are caught are not worth the tax prep fee you pay. I will not think twice about telling you to find another CPA if I know, or strongly suspect, that you are being dishonest about this. /rant ↩︎

This information is for entertainment or educational purposes only. Please consult your tax advisor for advice on your specific tax situation.