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Archives for September 2022

What’s the Difference Between 1099 and W-2?

The U.S. tax system is complicated, complex, and the IRS has hundreds of forms to account for different reporting needs. One of the biggest confusions for individuals is the difference between Form 1099 and the W-2. Both are important, absolutely required, but serve very different purposes.

Form 1099

There are multiple types of Form 1099. The most common is used to report various types of payments that are made by a business or individual that’s not an individual’s regular employer. The person that made the payments completes the appropriate details and sends a copy to the payee and the IRS at tax time.

A Form 1099-MISC is used by the government to report income such as Medicare earnings. It’s also used to report prizes and awards, fishing boat proceeds, medical and healthcare payments, and crop insurance proceeds. Form 1099-MISC is also utilized to report earnings from direct sales of at least $5,000.

W-2

In comparison, individuals complete a W-2 when they start a new job. It tells the employer how much money to withhold in federal, state and Social Security (FICA) taxes from each paycheck. The IRS utilizes that information to track each person’s earnings and income every year from employment. IRS rules state that employers must provide individuals with their W-2 by Jan. 31st of each year.

The form is used each year when an individual files their annual income tax returns. The W-2 shows the amount of any benefits that may have been paid by the employer on an employee’s behalf that encompasses items ranging from health savings accounts (HSA) and number of dependents to insurance benefits.

If there are any errors such as name misspellings, incorrect Social Security number, or an incorrect amount, individuals should contact their employer for a corrected copy of their W-2. Independent contractors should receive a 1099-NEC instead of a W-2.

At Peavy and Associates PC our mission is to assist you with all your tax preparations, payroll and accounting needs.  We provide our clients with professional, personalized accounting services and guidance in a wide range of financial and business needs. Give us a call today and discover why our clients return to Peavy and Associates, PC year after year!

 

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Is a Tax Credit Better Than a Tax Deduction

People typically look for all the credits to which they’re entitled when they complete their federal income tax return, but overlook tax deductions that they’re able to claim. Tax deductions can actually lower the amount of taxes people owe. An individual’s deductions will depend largely on their tax bracket and if they’re an employee or self-employed.

Tax credits and tax deductions both work to lower tax liability, but they work in different ways to accomplish that goal. Credits are a dollar-for-dollar reduction, while deductions decrease the amount of money that an individual is taxed on. The standard deduction is what most people claim. It’s a flat amount per person in the family. However, individuals can choose to itemize deductions instead, though it can increase the chances of an audit.

Deductions

There are deductions for a wide variety of situations, ranging from those for continuing education and buying a home to being self-employed. Those attending college can deduct the interest on their student loan and the amount of charitable donations up to $300 per person. There’s also a deduction for state and local taxes that are paid and mortgage interest.

For those that gamble, there’s a deduction for gambling losses, along with one for educator expenses. People that contribute to an IRA, 401k or health savings account (HSA) also receive a deduction. Individuals that are self-employed can take a home office deduction and self-employment expenses.

Tax Credits

If an individual can’t take advantage of tax deductions, don’t forget to explore the range of credits that are available. Individuals can receive a tax credit for child and dependent care, adopting a child, lifetime learning, and earned income for the number of children in the family. An energy credit is offered for installing certain energy-efficient items such as furnaces and AC units.

At Peavy and Associates PC our mission is to assist you with all your tax preparations, payroll and accounting needs.  We provide our clients with professional, personalized accounting services and guidance in a wide range of financial and business needs. Give us a call today and discover why our clients return to Peavy and Associates, PC year after year!

 

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What is Capital Gains Tax?

There’s some confusion for some about what the capital gains tax is, especially if they’ve sold an asset or they’re new to trading. It’s a tax that’s levied on the profit an individual makes when they sell an asset or investment. The asset can range from real estate to stocks and bonds. The amount of tax is determined by how much the asset has appreciated in value during the time it was held by the owner.

The rate of tax is also dependent on the filer’s income bracket. The tax can range from 0% to 15% or 20%. A long-term capital gains tax is assessed if an individual has owned the asset for a year or more. Short-term capital gains taxes will apply if the investment has been owned for less than a year and will be taxed according to the individual’s normal tax rate.

Unrealized capital gains refer to unsold investments. It doesn’t matter how much in assets an individual has, how long they’re held, or how much they’ve increased in value. Purchasing or investing in an asset and keeping it over the long term is a way of building wealth that can be passed on to heirs.

Maximizing profitability and minimizing capital gain taxes requires careful, well-though out strategies. For tax purposes, a purchased asset is typically treated the same as if was a salary or wages. The same is true of dividends derived from an asset.

An increasing number of people are using software applications to trade online. The thrill of buying and selling can override any benefits if they’re not aware of the capital gains taxes they’ll have to pay or if they don’t understand IRS laws.

However, taxable gains can be offset by capital losses. A maximum tax of $3,000 per year is levied on net losses. Leftover losses can be carried forward into following tax years.

At Peavy and Associates PC our mission is to assist you with all your tax preparations, payroll and accounting needs.  We provide our clients with professional, personalized accounting services and guidance in a wide range of financial and business needs. Give us a call today and discover why our clients return to Peavy and Associates, PC year after year!

 

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If I’m Self-Employed, What Tax Deductions do I Qualify For?

An increasing number of people are launching their own businesses. Government figures indicate that ¼ of the self-employed have an incorporated business operation. However, a full ¾ of all self-employed people have an unincorporated enterprise.

Nearly 11 percent of people in the U.S. are self-employed, representing 15 million individuals. It includes home-based businesses, those in the gig economy, entrepreneurs, startups, and small business endeavors.

Tax time is especially painful financially for the self-employed. They have to pay state and federal taxes, and may need to pay city taxes. Individuals need to pay FICA taxes and are forced to pay a self-employment tax. The good news is that there are a variety of deductions that can help ease the pain at tax time.

Home Office

Those that work out of their home can deduct a portion of the total area of their home’s square footage if they’re self-employed, but not if they work for someone else. The space will have to be used regularly, be the principal place of business, and only be used for business purposes. Individuals can deduct the cost of rent for business space.

Credit Card Interest

Qualified business purchases placed on a credit card may be deductible. It can include phone bills, business travel, meals rent, internet service, office equipment, membership dues for professional organizations, and other expenses/utilities necessary for operating the business.

Training and Education

Taking a course to maintain or improve current skills relating to the business may be tax deductible. Expenses includes the cost of the course, tuition, books and supplies, and transportation.

Insurance Premiums

Premiums for business insurance are deductible for those who are self-employed.

Self-Employment Tax

The IRS allows people that are self-employed to deduct 50 percent of their total self-employment tax, subject to certain income limits.

At Peavy and Associates PC our mission is to assist you with all your tax preparations, payroll and accounting needs.  We provide our clients with professional, personalized accounting services and guidance in a wide range of financial and business needs. Give us a call today and discover why our clients return to Peavy and Associates, PC year after year!

 

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