Publication 911 |
2000 Tax Year |
Basic Tax Information
The following discussion gives basic tax information that may help
if you have never been in business for yourself. For more information
about starting a business, see Publication 583.
Employer Identification
Number (EIN)
EINs are used to identify the tax accounts of employers, certain
sole proprietors, corporations, partnerships, estates, trusts, and
other entities.
If you do not already have an EIN, you need to get one if any of
the following apply to your business.
- You have employees.
- You have a Keogh or other qualified retirement plan.
- You operate your business as a corporation or
partnership.
- You file returns for:
- Employment taxes,
- Excise taxes, or
- Taxes on alcohol, tobacco, or firearms.
Use Form SS-4 to apply for an EIN.
Business Taxes
The following kinds of federal business taxes may apply to direct
sellers.
- Income tax
- Self-employment tax
- Employment taxes
Your state, county, or city may impose other kinds of tax and
licensing obligations.
Income tax.
All businesses except partnerships must file an annual income tax
return. (Partnerships file an information return.) For example, if you
operate your direct-selling business as a sole proprietor, you must
file Schedule C or Schedule C-EZ as part of your individual
income tax return (Form 1040). You are a sole proprietor if you are
self-employed (work for yourself) and are the only owner of your
unincorporated business.
Self-employment tax.
Self-employment tax is the social security and Medicare tax for
those who work for themselves. It is similar to the social security
and Medicare taxes withheld from the pay of wage earners. If you are a
direct seller, you generally must pay this tax on your income from
direct selling. You must pay it whether you are a sole proprietor or a
partner in a partnership. Use Schedule SE (Form 1040) to figure your
self-employment tax. For more information about self-employment tax,
see Publication 533.
Social Security Administration (SSA) time limit for posting
self-employment income.
Generally, the SSA will give you credit only for self-employment
income reported on a tax return filed within 3 years, 3 months, and 15
days after the tax year you earned the income. If you file your tax
return or report a change in your self-employment income after this
time limit, SSA may change its records, but only to remove or reduce
the amount. SSA will not change its records to increase the amount of
your self-employment income.
Employment taxes.
If you have employees in your business, you generally withhold and
pay the following kinds of employment taxes.
- The federal income tax you withhold from employees'
wages.
- Social security and Medicare taxes--both the amount you
withhold from employees' wages and the amount you pay as the
employer.
- Federal unemployment (FUTA) tax (none of which is withheld
from the employees' wages).
For more information, see Publication 15.
Other taxes.
For information about deducting personal property and other taxes,
see Taxes under Business Expenses, later.
Estimated Tax
The federal income tax is a pay-as-you-go tax. You must pay it as
you earn or receive income during the year. There are two ways to pay
as you go.
- Withholding. If you are an employee, your
employer likely withholds income tax from your pay. By revising your
W-4, you can increase your withholding to cover the income from
your job and from direct selling.
- Estimated tax. If you do not pay tax through
withholding, or do not have enough withheld, you may have to pay
estimated tax.
Estimated tax is used to pay both income and self-employment
taxes. For more information on estimated tax, see Publication 505.
Exceptions.
You do not have to pay estimated tax if you meet either of the
following exceptions.
- You had no tax liability last year, you were a U.S. citizen
or resident for the whole year, and your tax year covered all 12
months.
- Your total expected taxes for 2001, minus any expected tax
credits and withholding, will be less than $1,000.
Form 1040-ES.
Use Form 1040-ES to figure your estimated tax and make
quarterly estimated tax payments.
Form 2210.
If you did not pay enough estimated tax or have enough income tax
withheld, you may be subject to a penalty for underpayment of tax. You
can use Form 2210 to figure the penalty. Or, in most cases, you can
have the Internal Revenue Service figure the penalty for you. See the
Form 2210 instructions to determine if you must complete the form.
Information Returns
If you have other direct sellers working under you and you sell
$5,000 or more in goods during the year to any one of those sellers,
you must report the sales on an information return. The information
return, Form 1099-MISC, must show the name, address, and
identification number of the seller placing the orders. Check box 9 of
Form 1099-MISC to show these sales. Do not enter a dollar
amount. You must give Copy B or a qualified statement (such as a
letter showing this information along with commissions, prizes,
awards, etc.) to the seller by January 31, 2001.
You must file Copy A of Form 1099-MISC with the Internal
Revenue Service by February 28, 2001. If you file electronically, you
have until April 2, 2001. Use Form 1096 to summarize and transmit Form
1099-MISC. See the instructions for Form 1096 for the address
where you must file Form 1096 and the accompanying Forms
1099-MISC.
Penalties
The law imposes penalties for noncompliance with tax laws. Some of
these penalties are discussed next. If you underpay your tax due to
fraud, you could be subject to a civil fraud penalty. In certain
cases, you could be subject to criminal prosecution.
Failure-to-file penalty.
If you do not file your return by the due date (including
extensions), you may have to pay a failure-to-file penalty. The
penalty is 5% of the tax not paid by the due date for each month or
part of a month that the return is late. This penalty cannot exceed
25% of your tax, and it is reduced by the failure-to-pay penalty
(discussed next) for any month both penalties apply. However, if you
file your return more than 60 days after the due date or extended due
date, the minimum penalty is the lesser of $100 or 100% of the unpaid
tax. You will not have to pay the penalty if you can show reasonable
cause for not filing on time.
Failure-to-pay penalty.
You may have to pay a penalty of 1/2 of 1% of your
unpaid taxes for each month or part of a month after the due date that
the tax is not paid. This penalty cannot be more than 25% of your
unpaid tax. You will not have to pay the penalty if you can show good
reason for not paying the tax on time. This penalty does not apply
during the automatic 4-month extension of time to file if you
paid at least 90% of your actual tax liability before the original due
date for your return.
The monthly rate of the failure to pay penalty is half the usual
rate (.25% instead of .50%) if an installment agreement is in effect
for that month. You must have filed your return by the due date
(including extensions) to qualify for this reduced penalty.
Penalty for frivolous return.
You may have to pay a penalty of $500 if you file a return that
does not include enough information to figure the correct tax or that
shows an incorrect tax amount due to either of the following reasons.
- A frivolous position on your part.
- A desire to delay or interfere with the administration of
federal income tax laws.
This penalty is in addition to any other penalty provided for
by law.
Accuracy-related penalty.
An accuracy-related penalty of 20% applies to any underpayment due
to the following reasons.
- Negligence or disregard of rules or regulations.
- Substantial understatement of income tax.
This penalty also applies to conditions not discussed here.
Even though an underpayment was due to both negligence and
substantial underpayment, the total accuracy-related penalty cannot
exceed 20% of the underpayment. The penalty is not imposed if you can
show reasonable cause accompanied by good faith.
Negligence.
Negligence includes the lack of any reasonable attempt to comply
with provisions of the Internal Revenue Code.
Disregard.
Disregard means the careless, reckless, or intentional disregard of
rules or regulations.
Substantial understatement of income tax.
For an individual, income tax is substantially understated if the
understatement exceeds the greater of the following amounts.
- 10% of the correct tax.
- $5,000.
Information reporting penalties.
A penalty applies if you do not file information returns by the due
date, if you do not include all required information, or if you do not
report correct information. A penalty applies to information returns
as follows.
- Correct information returns filed within 30 days after the
due date, $15 each.
- Correct information returns filed after the 30-day period
but by August 1, $30 each.
- Information returns not filed by August 1, $50 each.
Maximum limits apply to all these penalties.
Failure to furnish correct payee statements.
Any person who does not provide a taxpayer with a complete and
correct copy of an information return (payee statement) is subject to
a penalty of $50 for each statement. If the failure is due to
intentional disregard of the requirement, the minimum penalty is $100
per statement with no maximum penalty.
Failure to supply identification number.
If you do not include your identification number or the
identification number of another person where required on a return,
statement, or other document, you will be subject to a penalty of $50
for each failure. You will also be subject to the penalty
if you do not give your identification number to another person when
it is required on a return, statement, or other document.
You will not have to pay the penalty if you are able to show the
failure was due to reasonable cause and not willful neglect.
Accounting Periods
and Methods
All income tax returns are prepared using an accounting period (tax
year) and an accounting method.
Accounting Periods
When preparing a statement of income and expenses, you must use
books and records for a specific interval of time called an accounting
period. The annual accounting period for your tax return is called a
tax year. You can generally use one of the following tax
years.
- A calendar year, which begins on January 1 and
ends on December 31.
- A fiscal year (including a period of 52 or 53
weeks). A regular fiscal year is 12 months in a row ending on the last
day of any month except December.
You establish a tax year when you file your first income tax
return. If you filed your first return as a wage earner using the
calendar year, you must use the calendar year as your business tax
year. You generally cannot change your tax year without IRS approval.
For more information, see Publication 538.
Accounting Methods
An accounting method is a set of rules used to determine when and
how income and expenses are reported. You must use the same accounting
method from year to year. The two most common accounting methods are
the cash method and an accrual method. A third method, called a hybrid
method, is generally a combination of cash and accrual.
The text and examples in this publication generally assume you use
the calendar year as your tax year and either the cash or hybrid
method as your accounting method. If inventories are needed to account
for your income, you must use an accrual method, discussed later, for
your sales and purchases. For more information on accounting methods,
see Publication 538.
Cash method.
Under the cash method, you report income in the year it is
received, credited to your account, or made available to you on
demand. You need not have physical possession of it. You deduct
expenses in the year you pay them, even if they were incurred in an
earlier year.
Check received.
If you receive a check before the end of the tax year, you must
include it in income for the year you receive it even though you do
not cash or deposit it until the next year.
Accrual method.
Generally, you report an item of income in the tax year when all
events have happened that fix your right to receive the income and you
can determine the amount with reasonable accuracy. Generally, you
deduct or capitalize business expenses when you become liable for
them, whether or not you pay them in the same year.
Prepaid expenses.
Expenses paid in advance can only be deducted in the year to which
they apply under either the cash or an accrual method. For example,
suppose you have a subscription to a direct-selling journal that runs
out at the end of 2000. It will cost you $30 to renew the subscription
for one year or $54 for 2 years. You decide to renew for 2 years and
mail your check at the end of November 2000. You cannot deduct the $54
on your 2000 return, even if you use the cash method of accounting.
However, you can deduct half of the $54 in 2001 and the other half in
2002.
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