Many of us have already received a paycheck in 2011.  You may have been pleasantly surprised to see that your take home pay was more than last year.  A provision in the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 reduced the Social Security withholding percentage from 6.2% to 4.2%; employer matching percentage remains at 6.2%.

 The good news also applies to self-employed individuals.  The 15.3% S/E tax liability that many of us forget about will be reduced to 13.3%.

 How this will affect the amount of your future benefits remains to be seen. 

 Social Security taxes apply to the first $106,800 of earnings so the maximum savings will be $2,136.

 Be sure to look over your first paycheck of 2011 carefully to make sure that your check is properly calculated.  Any error should be brought to the attention of your payroll department immediately.

 Don’t hesitate to contact me if you have any questions about this or any other matter.

The recently enacted Small Business Jobs Act of 2010 requires landlords to report payments of $600 or more to each service provider during the year to the IRS on Form 1099-MISC.  The $600 threshold is cumulative and applies to all payments made on or after January 1, 2011.  This means that you will need to obtain the name, Federal Tax Identification Number (or Social Security number), and address from all individuals and businesses that provide services to your property (gardeners, painters, property managers, maintenance people, etc.). 

I recommend you have each service provider complete Form W-9 at the time you engage his or her services, even if you are paying less than $600; you may utilize their services again later in the year.  Form W-9 is the form used to obtain required information from the service provider and can be downloaded from the IRS website.  Services provided by corporations will be exempt from this reporting requirement until 2012.

Although not required, it is advisable to obtain a tax ID number for yourself if you do not already have one.  The payor section of Form 1099-MISC requires either your tax ID number or your Social Security Number.  For privacy purposes, it is not prudent or wise to issue documents that display your Social Security number.

 As always, I am available to help you comply with these new filing requirements.

One of the most popular forms of business is the S-Corporation.  Depending on your point of view, an advantage of this form of business are the flow-through characteristics meaning any residual profits or losses from the business flow-through to the shareholders’ individual tax return.  A quick way to get yourself in trouble is to deduct a disallowed flow-through loss on your personal return because of basis limitations.

What is this thing called basis?  Basis is your investment in the company.  When you incorporated, you purchased stock, this gives you basis.  If you invested additional capital or contributed assets to the corporation, this increases your basis.  If your business shows a profit, this increases your basis.  Business losses and monies taken out of the business in the form of distributions to shareholders decrease your basis.  For example, you purchase stock in your corporation for $5,000, contribute additional cash in the amount of $10,000, and your first year profit is $25,000.  Your basis in the corporation is $40,000. 

Your ability to deduct flow-through business losses is limited to the extent that you have basis, as described above.  Continuing the example, if your second year of operations results in losses of $50,000, your deduction is limited to your basis of $40,000, the remaining $10,000 becomes a suspended loss and carries forward until such time as you have reestablished sufficient basis to take the loss.

To further complicate matters, if you have personally loaned the corporation money, you have what is called debt basis.  Debt basis allows you to deduct an otherwise suspended loss.  For example, if you had also loaned your corporation $25,000, the $10,000 previously suspended loss becomes deducible because of your debt basis. 

This is a simplification of the computations that must be performed to maintain your basis.  I recommend consulting your tax professional as soon as you setup your S-Corporation to make sure you understand the tax implications of this form of business entity.