On Saturday, July 15th, Hammernik & Associates sponsored and participated in the 2nd Annual Mike Neufeldt Golf Outing For MDA. Participants received a Hammernik & Associates drawstring bag which was filled with golf balls, tees, a golf towel and snacks. The event was emceed by Tom Pipines and Steve "The Homer" True. Overall, over $40,000 was raised for the Muscular Dystrophy Association! Hammernik & Associates accepts donations for MDA all year.
One potential business tax reduction strategy is to hire independent contractors instead of employees. If a worker’s classification fits within the tax law, it’s a legitimate strategy that can save you thousands of dollars. But sometimes the classification isn’t clear-cut. You may think you have the independent contractor classification correct, but when the IRS does the audit, you could learn the IRS considers those contactors W-2 employees. This can cost you a huge sum of money in back payroll taxes. The law requires that you withhold taxes on the wages you pay to your employees. If you don’t, you are liable for the withholding and FICA (i.e., Social Security and Medicare) taxes that you neglected to remit to the IRS. Thus, if the IRS reclassifies your independent contractors as W-2 employees, you are on the hook for the taxes you should have taken from the paychecks. But you have a way out of a big chunk of this potential tax bill: If you can show the worker paid the taxes, then you aren’t liable for them. This rule prevents the taxes from being paid twice. For this favorable treatment, which is on a worker-by-worker basis, you need the worker to sign IRS Form 4669, Statement of Payments Received.
When Does The IRS consider your "business" a hobby...
On their 2010 income tax return James and Robyn Hess included a Schedule C for their Amway business. They had started this activity in 2005. This was their first independent business venture and they did not consult with anyone other than their sponsoring distributors before deciding to become Amway distributors. They conducted their Amway activities in their free time on evenings and weekends. [Editor note: they had six children which may make a person wonder just how much free time they had.]
The Hess’ attended Amway training functions organized by Worldwide Group LLC. The meetings provided them with training necessary for them to start and eventually grow their Amway business. Each year they attended Amway’s quarterly meetings as well as local monthly meetings. They testified they met with prospective downline distributors 2-3 times a month in the early years and increased this to 5-7 per month during 2010. But their records showed meetings with only 10 prospective distributors for the entire year. When asked for names of their downline distributors, they could not name any or any other evidence they existed.
They did not have a business plan. They did not have a budget, an estimated of revenues or expenses, or a profit and loss statement. They did keep records of their expenses but did not keep records of how much product they sold, to whom the product was sold, or the names of their downline distributors.
The results of their Amway business produced the following income and losses to offset their 90k of wages: Year/Gross receipts/Net losses reported 2005 / not provided / 19k 2006 / not provided / 10k 2007 / 429 / 10k 2008 / 628 / 16k 2009 / 2178 / 22k 2010 / 1545 / 23k 2011 / 318 / 25k
Despite the repeated losses, Mr. & Mrs. Hess did not change the way they operated their Amway activity nor did they seek advice from anyone other than their sponsoring distributors. Although they kept records of their expenses, they were used to be able to support deductions on the tax return; the expense records were not used as an analytical tool to make the business profitable.
Tax Court agreed with IRS in ruling this activity was a hobby and the losses were denied. This result should be kept in mind if you participate in direct sales activities like Amway, Mary Kay, Pampered Chef, Pure Romance, Arbonne, etc. If you are participating simply to receive free product, and you have no intention of making money, the IRS is going to lean towards hobby.
Our Client Appreciation Contest now runs throughout the entire year. Each month we will draw a winner for gift cards and other great prizes, like the sweet new backpack pictured. Are you entered in the contest? Every referral that you send our way gets you 5 entries. You can also earn entries by giving us a review on Google, Yelp, or Facebook...that sounds pretty easy! Other ways to enter include: donating to MDA, taping a video testimonial, and more!
Even millionaires can get in trouble with the IRS. Each month we will highlight a relevant tax issue in the news.
Floyd "Money" Mayweather is known as one of the best boxers of all time, boasting a record of 49-0. He is also well known for openly flaunting how much money he has by carrying around stacks of cash, taking pictures of cash, and gambling large sums on sporting events.
Mayweather is in the news lately for a highly anticipated boxing match that will pay him at least $100 million. He is also in the news for being on the hook with the IRS for almost $30 million. It is being reported that he owes $22 million from his 2015 tax return, and also has an outstanding tax lien of $7 million from 2010.
Floyd claims that he is waiting to get paid from the upcoming fight to pay off the IRS debt...this one is a headscratcher. How could someone that has so much money, and is still making a lot of money, not pay their taxes?
Well, this is Floyd's tax attorney's answer, "Floyd's a savvy investor and if he is investing money and getting a rate of return that far exceeds what he has to pay the IRS in interest, then any smart business person is going to take advantage of that deferral," Morse said. "So we've taken advantage of that."
For reference, the current IRS interest rate is 4%.
Is there a certain tax or financial topic you would like to see in next month's newsletter? Let us know!!
Hammernik & Associates
2448 S. 102nd Street #130
West Allis, WI 53227