Even the most honest taxpayer will be alarmed when they receive an audit notice. Although it doesn’t occur often (in 2022, the IRS only audited approximately four out of every 1000 returns filed), it can still happen to anyone, even when they’re sure their taxes have been done correctly. The Minnesota Department of Revenue audits income and sales tax returns far more frequently.
If you’re facing an IRS or MDR audit, it’s important to understand why it may have happened, what you should do, and what your rights and responsibilities are. This blog outlines 5 things you should do if you get audited in Minnesota, which may include seeking legal representation. If the audit is complicated or charges are potentially involved, hiring an experienced Minnesota tax lawyer can significantly affect the outcome.
Some tax returns are more likely to be audited than others. If you are self-employed, receive a lot of your income from tips, or run a cash-intensive business, you can expect the IRS or MDR to pay closer attention. Other issues that can raise a red flag include:
It’s important to note that being audited doesn’t mean you’re accused of a crime. A tax audit is simply a review of your return to ensure its accuracy. The IRS and MDR expects you to prove that you have accurately reported all your income and are eligible for all the credits, deductions, and exemptions you claimed.
If you are selected for an IRS or MDR audit, you should take the following steps:
When you are selected for an audit, the IRS or MDR usually notifies you by mail. Be sure to read the notice carefully to understand why the audit is taking place and what information the IRS or MDR needs from you.
Please note that there are three types of tax audits:
Here are some examples of the information and documentation you may be asked to produce during an IRS or MDR audit:
If you receive an audit notice from the IRS or MDR, you should respond as soon as possible. You should aim to reply within the specified timeframe, even if you need more time to gather the requested information. If you need more time, you can request an extension in writing, but you need to do so before the original deadline expires.
Keep in mind that the IRS or MDR has the authority to issue an administrative summons, similar to a subpoena, if you do not respond to an audit notice or fail to supply information and documents an IRS auditor has requested. Therefore, it’s important to take these notices seriously and respond in a timely and thorough manner.
Consider seeking the help of a tax professional, such as a Minnesota tax attorney, to represent you during the audit. Here are some of the ways they can help:
If you cooperate with the IRS or MDR during an audit, the process will go more smoothly and the risk of penalties can be reduced. In addition to responding promptly to the original notice and organizing all relevant information, you can:
Next to “What if I get audited in Minnesota?” your biggest question may be how to handle or avoid a tax audit in 2023.
While there is no guaranteed way to completely avoid an IRS or MDR tax audit, there are some steps you can take to reduce your chances of being selected. Here are some tips:
Tax audits can be an intrusive and frustrating experience. If you have received notice that you are facing an office or field audit, your next step should be to contact a Minnesota tax lawyer.
Individuals and businesses facing an audit typically seek the assistance of an accountant or other tax professional. Although these professionals can offer valuable advice, they may also be forced to reveal confidential financial information. The attorney-client privilege will protect your information if you hire a tax lawyer.
At Pridgeon & Zoss, PLLC, we help individuals, businesses, and organizations navigate the auditing process. Time and again, our straightforward, strategic approach to tax law has led to favorable results. For more information or to schedule a consultation, contact us today.
]]>However, problems arise when a company uses the money for other purposes, such as paying vendors, utilities, or rent. In most cases, the employer fully intends to replace the trust funds that they borrowed in this manner, but during times of tighter cash flow, back taxes can accumulate faster than they can be repaid.
If the employer fails to pay these trust fund taxes on time, IRC 6672 permits the government to impose the Trust Fund Recovery Penalty (TFRP) to collect it. This liability is personal and assessed against a responsible person or persons (including employees). It is separate from, and in addition to, the original tax debt.(including employees) if the original tax debt is not paid in full.
The TFRP may be assessed against any individual who is responsible for collecting or paying income or employment taxes that have been withheld and willfully fails to do so.
The IRS defines a ‘responsible person’ as an individual or group who has the duty and authority to oversee the collection, accounting, and paying of trust fund taxes. Depending on how the business is set up, this could be one or more of the following:
An individual’s responsibility hinges on whether or not he or she exercised independent judgment in managing the business’s finances. The employee is not responsible if his or her sole function is to pay the bills as directed by a superior, rather than determining which creditors to pay.
Wilfulness is determined to exist when this responsible party must have been (or at least should have been) aware of the obligation and either intentionally disregarded it or was simply indifferent. Evidence of willfulness includes using the money to pay other creditors instead of remitting the money to the IRS.
The IRS does not have to prove that the company representatives acted maliciously. Their actions are considered willful as long as they were aware of or should have known about the outstanding employment taxes but did not take appropriate action.
IRS Form 4180 is a questionnaire that the government uses for payroll tax debt cases. The interview is intended to determine who is responsible. The IRS representative, a Revenue Officer, is not only trying to learn if the interviewee is responsible, but who else in the organization might share liability.
If you are selected for an interview, you will first be asked for your name, Social Security number, phone number, and address. Next, the interviewer will ask you about your job title or your relationship with the company.
The interviewer works through a checklist of questions about your involvement with the company’s finances and payroll. You can expect questions such as these:
Depending on your situation, the agent may ask you more specific questions, such as if you have login information for online accounts or authorization to sign checks for the company. These questions help clarify your role in the company’s finances. If the company uses a third-party payroll provider, those representatives will be questioned too, to determine how the money is distributed to the provider and what its employees may have known about the situation. In most cases, it is not advisable to voluntarily participate in this process without the advice and assistance of a competent attorney.
Upon completion of the interview, the IRS will send you a proposed assessment (Letter 1153). You will have 60 days to appeal before the government assesses the civil penalty.
The TFRP amount equals the amount of tax that should have been paid under the FICA. If, for example, a single payroll period should have had $14,520 withheld for income tax, Social Security, and Medicare, the TFRP would be $14,520. When several payroll periods are involved, the amount of money to be collected can be significant.
The goal of the IRS is to get the trust fund debt paid – who the money comes from isn’t as important. TFRP liability is legally referred to as “joint and several.” That is, the IRS won’t hesitate to impose the penalty on as many individuals as possible. Each assessed responsible person is liable for the entire amount; and each assessed responsible person gets a credit for amounts paid by, or collected from, any other responsible person.If one assessed responsible person ends up paying the entire amount, she or he is entitled to seek contribution from any other responsible person What if I Disagree With the TFRP Assessment?
When a company disagrees with the findings of an IRS investigation, it may write a protest letter and send it directly to the IRS officer handling the case. This letter should include details about why the TFRP shouldn’t be assessed and explain why the officer’s conclusions were inaccurate.
The IRS can rescind Letter 1153 if they agree with the protest letter, although this doesn’t happen in most cases. Instead, the letter will be forwarded to an appeals officer who will review your argument and make a decision. If the matter cannot be resolved during the appeal process, the next step is the U.S. District Court. It’s a complicated process that is best undertaken with help from a Minnesota tax defense lawyer.
You have several options if you cannot immediately pay the full penalty amount:
A tax lawyer can help you identify and seek the relief option that makes the most sense for your circumstances.
At Pridgeon & Zoss, PLLC, we understand how a penalty from the IRS can cause stress and disruption in your life. The government will review your personal and business assets, contact your bank and employees, and basically intrude on every aspect of your life. Protecting your interests requires a strong defense, and our lawyers have years of experience protecting client rights in tax controversies.
To schedule a consultation to discuss your case, please contact us today. We serve clients throughout Minnesota and western Wisconsin from our offices in Edina and Roseville and look forward to assisting you with your TFRP situation.
]]>Fortunately, you have the right to appeal. In this complete guide to the Minnesota tax process, we explain your options when you don’t agree with an assigned tax liability and how a tax appeal lawyer at Pridgeon & Zoss, PLLC can help you protect your rights.
Minnesota state taxes include the following: business taxes and fees, individual and corporate income taxes, and sales and excise taxes.
Based on the information you provide during your audit, the Commissioner of Revenue may determine that you either owe taxes or should be denied a refund. After this determination, which is also known as an assessment, you will receive a letter, called an Order, detailing the following:
Taxpayers who are notified that they owe tax or that their refund request has been denied can appeal administratively with the Appeals Office of the Minnesota Department of Revenue or appeal to the Minnesota Tax Court if they believe the determination is incorrect.
With an administrative appeal, you can request reconsideration of the Commissioner’s order. It’s less formal than a tax court appeal and you don’t incur costs like filing fees.
Within 60 days of receiving the assessment, you must request the administrative appeal and provide a statement as to why you disagree with the findings. You may request a 30-day extension if you need additional time to prepare an appeal, as long as you do so within 60 days.
During the administrative appeal, the Appeals Office will assign the case to an Appeals Officer who will handle the appeal for the Department of Revenue. The Appeals Officer will probably request additional documentation and other information before reaching a final conclusion. Upon completion of an administrative appeal, the Commissioner will issue a determination stating the findings. In the event you disagree with the commissioner’s findings, you can request the Minnesota Tax Court to decide the dispute by filing a complaint within 60 days of the final order.
You can appeal to the tax court immediately after receiving the audit Order without appealing to the MDR Appeals Office or after going through the administrative appeals process.
If you decide not to request an administrative appeal, you have 60 days from the date of the Commissioner’s Order to appeal to the Minnesota Tax Court. Appeal filing deadlines can be extended by 30 days if requested within this 60-day period. You may appeal to the tax court under the regular or small claims division, and you must pay the requisite filing fee.
State tax cases heard in the small claims division involve tax amounts under $15,000. This division has reduced filing fees, however, you do not have the ability to appeal the tax court’s final ruling to the Minnesota Supreme Court. There is also no court reporter present at these hearings, so no court record is created for these cases, which further reduces the costs associated with this option.
State tax cases heard in the regular division are cases in which the amount in controversy is over $15,000. Regular division cases can be appealed to the supreme court. A taxpayer whose case meets the criteria for filing in the small claims division may still file in the regular division.
Yes, if the Commissioner finds that you overpaid your state taxes, you may have the excess amount refunded to you. However, bear in mind that there are times when the state can keep your income or property tax refund to satisfy a debt. This is permitted by the Revenue Recapture Act. In cases where you owe money to a state or county agency, the Department of Revenue will likely send your refund to that organization.
If this happens and you believe you don’t owe money, you can write to the agency in question within 45 days of getting your notice. Known as a revenue recapture appeal, it gives you the opportunity to outline why the agency is not entitled to your refund. Acceptable reasons include:
When you successfully appeal an IRS audit, you should also appeal your Minnesota tax audit if the resulting changes impacted your state taxes. When preparing to schedule an appeal, be sure to collect all IRS documents showing that the original audit was reversed or revised.
While there is no law requiring you to use an attorney to guide you through the appeal process in Minnesota, there are excellent reasons why you should, especially if the amount of money at stake is significant.
Minnesota’s tax appeal process can reduce your income or property tax payment and save you substantial amounts of money. In many cases, however, the process is complicated and requires a significant amount of time and expertise to complete. A Minnesota tax attorney can:
A knowledgeable lawyer is a valuable investment. At Pridgeon & Zoss, PLLC, we are in an excellent position to represent and advise the diverse range of people and businesses that call Minnesota home. We have two offices to provide easier access to clients facing challenging and sensitive tax matters, including:
We understand the serious and sensitive nature of civil tax law disputes and strive to achieve the best possible result for every client.
At Pridgeon & Zoss, PLLC, our experience makes the difference. We have over 70 years of combined experience in tax law practice, allowing us to successfully resolve regular and complex tax law issues.
Our tax attorneys have a unique understanding of how the state and federal authorities investigate and prosecute serious tax law violations. We are confident our firm can help you resolve your tax dispute or negotiate an affordable settlement option or offer in compromise.
For more information about our legal services or to discuss a state tax law matter with a Minnesota tax lawyer, please contact us to schedule a legal consultation. Located in Edina and Roseville, we serve clients throughout Minnesota and western Wisconsin and look forward to helping you put your tax controversy behind you.
]]>Although the transition to self-employment appears to be at an all-time high, many startups fail within the early years, indicating that certain things need to be in place for a business to succeed. One of them is knowledge of the tax requirements and deductions aimed at Minnesota entrepreneurs. In this blog, we go over the various Minnesota self-employment help strategies you should be aware of.
If you have your own business in Minnesota, you are required to pay a self-employment tax, which is currently 15.3%. This tax covers Social Security (12.4%) and Medicare (2.9%). There are two calculations you’ll need to make:
Self-employment tax must be paid quarterly. You can use the worksheet on Form 1040-ES, Estimated Tax for Individuals, to determine if you must file quarterly estimated taxes on:
To reduce the risk of an underpayment penalty, it is recommended that you remit at least the same amount in taxes that you did the year before (if you worked for yourself then too). Check your previous year’s tax return to determine the total amount you paid, divide the number by four, and send a payment on each of the four due dates above.
If it turns out that you owe more tax this year, you’ll still have to pay it but you won’t be subject to an underpayment penalty. For example, if you paid $8,000 in taxes last year, you’ll send in four equal payments of $2,000 this year. If you discover at tax time that your total obligation is actually $10,000, you can remit the additional $2,000 without incurring a penalty.
If you find that your self-employment income fluctuates from one year to the next, you can use IRS Form 1040-ES to calculate your expected liability while allowing for certain frequently-claimed deductions.
As a business owner, you have to shoulder certain costs that employees don’t have to worry about, such as renting office space and business use of a vehicle. To make self-employment more sustainable, legislators have approved certain tax deductions that constitute a significant self-employment benefit.
When the Tax Cuts and Jobs Act took effect for the 2018 tax year, it made several important changes to self-employment tax deductions, including the qualified business income (QBI) deduction for those who pay taxes as an individual taxpayers rather than through a corporation. This deduction can apply to up to 20% of your QBI, which is the net amount of your income after gains, losses, and deductions have been applied.
Below are some of the tax deductions you may be able to make:
When you’re employed, you take certain things for granted, like health insurance and paid time off. These perks are all part of a standard benefits package but when you’re self-employed, you have to plan for them.
Vacations, sick days, and holidays must be added to your billable hours. A standard benefits package of two weeks off, five sick days, and ten paid holidays equals five weeks off per year. As a freelancer, you need to charge around 10% more than your hourly rate as an employee to compensate for five weeks off.
Another major perk of being self-employed is setting up a home office and avoiding the commute. However, running a business out of your house still costs money. Even if your computer works fine now, it will eventually need replacing. In order to make your at-home setup more ergonomic, you may need to buy a new chair or desk or purchase a computer monitor. Since you’re staying home all day, you’ll probably see an increase in your utility bills as well. These are all hidden expenses you need to account for.
When you’re looking for Minnesota self-employment help, one of your best resources is a tax attorney. If you’ve never worked for yourself before, you may be unfamiliar with self-employment taxes, approved deductions, and quarterly tax remittances. A Minnesota tax attorney can not only help you get started on the right foot but also provide advice and representation if you are audited by the IRS or the Minnesota Department of Revenue. Tax controversies can be stressful, and experienced legal help can help secure the best outcome.
Having your own business is exhilarating and rewarding, but there’s a lot of financial and tax planning involved. You’ll want to maximize your business deductions each year to mitigate the additional expenses of being self-employed, but sometimes the government steps in to question or deny a claim. If the IRS challenges any of your deductions, Pridgeon & Zoss, PLLC offers skilled and experienced representation.
Located in Edina and Roseville, we serve self-employed clients throughout Minnesota and western Wisconsin. We can help you defend the credits and deductions you claimed on your tax forms or represent you when there is a dispute with the MDR or IRS. If you have questions or need assistance, please contact us for a free half-hour initial consultation. We look forward to supporting your success.
]]>If you plan on going into business for yourself, there are different forms your new enterprise can take:
While self-employment can be hugely rewarding, there are big differences between being an employee and an entrepreneur. In this blog, the team at Pridgeon & Zoss, PLLC, reviews the various things you should know about becoming self-employed in Minnesota, including cash flow management, the need for health and business insurance, and an obligation to pay self-employment taxes.
When you’re working for yourself, you need to remain acutely aware of your financial position. Rent, business insurance, equipment upgrades, and other expenses formerly covered by your employer are now your responsibility. As a result, you need to pay close attention to accounts payable, accounts receivable, and other financial responsibilities while monitoring how much you take in every month.
In the beginning, many small business owners and freelancers can manage these issues using accounting and bookkeeping software. However, as your success grows and accounting becomes more complicated, working with a Minnesota tax attorney is the best way to ensure that you remain in compliance with the ever-changing state and federal tax laws.
If your spouse or domestic partner doesn’t have an employer-sponsored plan you can join, you’ll be responsible for your own health coverage. Depending on your personal situation, your options include:
Becoming self-employed in Minnesota means you will also want business and liability coverage, although your line of work will dictate your requirements. For example, a cafe owner may need property insurance and various liability policies, while a self-employed graphic designer who works from home will have different coverage concerns. In addition, self-employed professionals, particularly those who are licensed, will typically have to take out some form of professional liability insurance. Consult an attorney if you have questions about what type of insurance you need.
Self-employment tax is currently 15.3%, which is divided as follows:
Self-employment taxes must be paid quarterly using Form 1040-ES- Estimated Tax for Individuals. Forms and worksheets are available from the IRS to help you calculate self-employment taxes, but as your business grows and income streams become more complicated, you will want to look at having a professional do your taxes.
When you are working for yourself, you will have to keep track of any paperwork related to your self-employment income and expenses. This includes forms like 1099s and receipts for rent, utilities, software licenses, office supplies, and other business-related expenses. These records help ensure that your tax returns are accurate, reducing the risk of a negative outcome should you be audited.
Although working for yourself is an excellent life and career decision for many people, the IRS and the Minnesota Department of Revenue can sometimes make things complicated. Small businesses, freelancers, and self-employed professionals are three times more likely than salaried employees to be audited, and few things are more exhausting than discussing and disputing a tax liability.
Pridgeon & Zoss, PLLC offers dedicated and knowledgeable representation to self-employed individuals facing tax situations. We can help you defend the credits and deductions you rightly claimed on your tax forms or represent you before the MNR or IRS in a tax controversy.
With offices in Edina and Roseville, we represent clients throughout Minnesota and western Wisconsin. If you’re self-employed and have questions about your tax obligations or need assistance, contact the firm for a free half-hour initial consultation. We look forward to assisting you.
]]>Source documents create a paper trail that documents a financial transaction. These source documents are important for a number of reasons, including drafting financial statements, balancing your budget, and defending yourself in tax litigation. They can be maintained in paper or electronic form and must be kept for at least 3 to 4 years after the transaction has been completed.
At Pridgeon & Zoss, we advocate for both individuals and businesses in their dealings with the Internal Revenue Service (IRS) and the Minnesota Department of Revenue (MDR). We often rely on source documents to prove our clients’ case to the tax authorities. If you are facing an audit or are embroiled in a tax dispute, reach out to our law office today.
“Source document” is a term used in the accounting world to mean the original document that contains the details of a business or financial transaction. It typically has information about the names of the parties involved, the amount paid (if any), the purpose of the transaction, and the date. Source documents often have a unique number assigned to them, so that they can be easily identified within an accounting or software system.
Examples of source documents may include:
In the modern era, many businesses and individuals choose to store source documents in electronic form. This can be as simple as scanning a receipt or invoice or even taking a picture of a purchase order for your records. Most businesses and government agencies follow the IRS standard that photocopies or an electronic version of source documents are acceptable as long as they are legible, contain all of the information present in the original document, and present the information in a format that is identical to the original document.
Source documents are vital when it comes to bookkeeping and accounting because it proves that a particular financial transaction has occurred. For example, a company that sells widgets would want to keep track of all widget sales. Source documents – such as invoices and purchase orders – can be used to document each sale.
These documents can be used to monitor your business’ progress, prepare financial statements, identify the source of receipts, track deductible expenses, prepare tax returns, and support items reported on your tax returns. If you are audited, these source documents will be vital to support your position and to defend yourself in a tax dispute.
Depending on the type of business you run, you may need to maintain source documents related to:
These documents should be maintained by businesses just as an individual would keep receipts for tax-deductible items. During an internal or external audit, the source documents will prove that the financial transaction in question occurred.
The Internal Revenue Service (IRS) requires both individuals and businesses to keep certain source documents for a period of time. Generally, these documents should be maintained until the period of limitations for assessment of tax or for refund claims has expired. Individuals and businesses should maintain these source documents for:
If you plan to make a refund claim, you should keep the relevant records for a period of 2 to 7 years, depending on your specific financial situation. All documents related to employment taxes must be maintained for a period of 4 years.
If you are being audited by the IRS or the MDR, source documents will be vital to defending yourself and achieving the best possible outcome for your case. A skilled tax attorney can work with you to analyze your source documents and put together a strong defense.
Pridgeon & Zoss was founded by two former IRS attorneys. We have the knowledge and experience necessary to help our clients handle all types of tax issues, from audits to tax disputes to tax appeals. To learn more or to schedule a consultation with a Minnesota tax lawyer or fill out our online contact form.
]]>A Notice of Deficiency is how the IRS informs taxpayers that they owe additional taxes. While it is not a bill, if you fail to dispute the assessment within 90 days, then the IRS will send a bill for the outstanding taxes plus any applicable penalties and interest. The only way to challenge a Notice of Deficiency is by petitioning the United States Tax Court.
At Pridgeon & Zoss, we have substantial experience handling all types of tax litigation – including challenges to notices of deficiency. As former IRS tax lawyers, we understand the system and how to get the best possible outcome for our clients. If you have received a notice of deficiency from the IRS, give our law firm a call today to learn more about how we can fight for your rights.
A Notice of Deficiency and Increase in Tax (Form CP3219A) is a letter that the IRS sends to taxpayers after it determines that you either failed to file a tax return or there is an increase in the amount of tax due. A deficiency notice is not a bill, but if you fail to take action within 90 days of receiving it, then you will owe the disputed amount. For this reason, it is often referred to as a 90 day letter.
The IRS cross-references taxpayers’ returns with documentation received from employers and financial institutions. When the information that the IRS receives is different from what you reported on your tax returns, it may result in an increase or decrease in your tax obligations. The notice of deficiency explains how this tax amount was calculated, what to do if you agree or disagree with the amount, and how you can challenge it by petitioning the U.S. Tax Court.
In essence, a notice of deficiency is a legal determination that you have underpaid your taxes. While the notice states that the IRS is proposing a change in the amount due, its determination is presumptively correct.
A deficiency notice follows a pre-assessment letter, which is also known as a 30 day letter. If you fail to respond to the pre-assessment letter within 30 days, then the IRS will process the changes made to the return and issue a statutory notice of deficiency. At this point, you will either have to agree with the additional tax liability or pursue tax litigation to challenge the assessment.
Taxpayers have two primary options after receiving a notice of deficiency: agreeing to the assessment or challenging it via the U.S. Tax Court. If you do not wish to appeal the determination, you can sign and submit Waiver Form 4089 and pay the tax due.
A taxpayer can also dispute the assessment in Tax Court. Any challenge must be made within 90 days of the date that the notice of deficiency was mailed to the taxpayer. An experienced IRS tax litigation attorney can advise you about disputing a notice of deficiency and represent you throughout the process.
The IRS is barred from starting a collection action until after the expiration of the 90 day period or until the U.S. Tax Court issues a decision. However, if you fail to take action on the notice of deficiency, then the IRS can send a tax bill for the assessed taxes, penalties and interest. If you fail to pay this tax bill, then the IRS will begin a collection action.
If the IRS has notified you that you owe taxes, then you may be panicked and unsure of your options. The U.S. Tax Code is incredibly complex, and difficult for most people to understand. An experienced tax litigation attorney can help you achieve the best possible outcome for your case.
Pridgeon & Zoss represents taxpayers before the IRS and the Minnesota Department of Revenue. Our legal team has decades of combined experience resolving tax disputes on behalf of our clients, through settlements, offers in compromise, installment payments, and tax litigation. To learn more or to schedule a consultation with a seasoned Minnesota tax attorney, give us a call at 952-835-8320 or fill out our online contact form.
]]>Review the process of filing an appeal for business taxes with the IRS.
If you receive a letter from the IRS and do not agree with its decision, the document may contain information about your right to appeal. You can also appeal if you decline to sign a form sent to you by the agency.
During the appeal process, the appeals board will review whether the IRS failed to properly interpret or apply the law, has taken improper collections actions, or used incorrect information to make a decision about your tax case.
You must file a formal written protest if you meet the above criteria for IRS appeal. You can represent yourself before the Appeals Board or seek representation from a qualified individual such as an attorney, enrolled agent with permission to practice before the IRS, or certified public accountant.
If you are disputing improper collection of taxes, you must follow the process based on the type of appeal. Options include offer in compromise appeals, collection due process and collection appeals program.
After filing your request for an appeal, you must wait to hear from the IRS. You can contact the agency for an update after 120 days. For questions about your appeal, business owners should call the IRS toll-free taxpayer assistant.
]]>However, the freedom of self-employment does not relieve you from your obligation to pay taxes. Instead, your tax obligation changes, and you have more responsibility than you did as an employee. Here is a guide to self-employment taxes and how to file them.
Federal law requires most workers to pay taxes that go to Medicare and Social Security. When you work as someone else’s employee, your employer withholds a certain amount of your paycheck to fulfill this obligation on your behalf. However, as a self-employed person, you usually do not receive a regular paycheck, meaning that there is typically no withholding. Instead, you fulfill your obligation by paying self-employment taxes. These are separate from the income taxes you owe on a yearly basis.
The Internal Revenue Service expects you to pay self-employment taxes on a quarterly basis. If you do not pay them until the end of the tax year when you file your income taxes, you usually have to pay a penalty.
The IRS provides special forms and worksheets to help you calculate self-employment taxes. You should also keep track of any paperwork related to your self-employment income. These include receipts for business-related expenses for which you plan to take deductions and forms related to income. Self-employed people often receive 1099 forms in lieu of the W2s that employees receive from their employers.
Not everyone who receives self-employment income has to pay self-employment taxes. The obligation applies if you are earning your living from self-employment. The IRS does not assess self-employment taxes if you make less than $400 a year working for yourself.
]]>The first step toward repayment of your outstanding tax balances may be filing a financial statement with the Minnesota Department of Revenue. Along with supporting documentation, MDR uses this information to evaluate your ability to pay back your debt. After MDR makes its determination, there may be repayment options available to you, such as the following.
Both the state Department of Revenue and the Internal Revenue Service may be willing to make an arrangement by which you agree to pay back what you owe a little bit at a time, usually on a monthly basis. Fees, interest and penalties may apply. It is important to hold up your end of the agreement by paying each tax notice on time.
Depending on the type of bankruptcy you file and the taxes you owe, filing for bankruptcy may allow you to discharge tax debt or reorganize your debt so that it becomes part of a larger repayment plan.
If you file for bankruptcy, it may discharge your tax debt so that the IRS or MDR end up getting nothing from you. It is more beneficial for them to receive a portion of what you owe. Therefore, they may be open to an offer in compromise, in which you propose, in writing, to pay a tax settlement that is less than the full amount.
If you are able to demonstrate financial hardship, the MDR may reconsider enforced collection actions against you. As a business owner, you can demonstrate financial hardship in the form of payroll checks that you cannot honor. You can provide your business information by filling out Form C58B, available from the MDR.
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