Law Office of James D. Lynch - California

Difference Between a Business and a Hobby for Tax Purposes

A hobby is any activity that a person pursues because they enjoy it and with no intention of making a profit. People operate a business with the intention of making a profit.

Many people engage in hobby activities that turn into a source of income. However, determining if that hobby has grown into a business can be confusing.

To help simplify things, the IRS has established factors taxpayers must consider when determining whether their activity is a business or hobby.

These factors are whether:

● The taxpayer carries out activity in a businesslike manner and maintains complete and accurate books and records.
● The taxpayer puts time and effort into the activity to show they intend to make it profitable.
● The taxpayer depends on income from the activity for their livelihood.
● The taxpayer has personal motives for carrying out the activity such as general enjoyment or relaxation.
● The taxpayer has enough income from other sources to fund the activity
● Losses are due to circumstances beyond the taxpayer's control or are normal for the startup phase of their type of business.
● There is a change to methods of operation to improve profitability.
● The taxpayer and their advisor have the knowledge needed to carry out the activity as a successful business.
● The taxpayer was successful in making a profit in similar activities in the past.
● The activity makes a profit in some years and how much profit it makes.
● The taxpayer can expect to make a future profit from the appreciation of the assets used in the activity.

All factors, facts, and circumstances with respect to the activity must be considered. No one factor is more important than another.

If a taxpayer receives income from an activity that is carried on with no intention of making a profit, they must report the income they receive on Schedule 1, Form 1040, line 8.

Filing an Extension to Get an Automatic Six More Months to File

For most individual taxpayers, the tax filing and payment deadline is Monday, April 18, 2022. Those who need more time to complete their return can request an automatic six-month extension to file. The extension allows for extra time to gather, prepare and file paperwork with the IRS.

This extension gives taxpayers until October 17 to file their tax return. Taxpayers must request an extension to file by the regular April 18th due date of their return, or they may face a failure to file penalty.

However, taxpayers should be aware that an extension to file their return doesn’t grant them an extension to pay their taxes. They should estimate and pay any owed taxes by their regular deadline to help avoid possible penalties.

The Difference Between Standard and Itemized Deductions

Taxpayers have two options when completing a tax return: take the standard deduction or itemize their deductions. Taxpayers should use the option that gives them the lowest overall tax.

The standard deduction amount increases slightly every year and varies by filing status. The standard deduction amount depends on the taxpayer's filing status, whether they are 65 or older or blind, and whether another taxpayer can claim them as a dependent. A married individual filing as married filing separately cannot take the standard deduction if the other spouse itemizes deductions - if one spouse itemizes on a separate return, both must itemize.

Itemized deductions that taxpayers may claim include: state and local income or sales taxes, real estate and personal property taxes, home mortgage interest, mortgage insurance premiums on a home mortgage, personal casualty and theft losses from a federally declared disaster, gifts to a qualified charity, and unreimbursed medical and dental expenses that exceed 7.5% of adjusted gross income.

Holiday Scam Reminder: Gift Cards Are Never Used To Make Tax Payments

This holiday season the IRS reminds taxpayers that the IRS does not ask for (or accept) gift cards as payment for a tax bill. However, that doesn’t stop scammers from targeting taxpayers by asking them to pay a fake tax bill with gift cards.

Here's how this scam usually happens: A scammer posing as an IRS agent will call the taxpayer (or leave a voicemail with a callback number) telling them that they must pay a fake tax bill or a fictitious tax penalty. The scammer will then instruct the taxpayer to buy gift cards from various stores. Once the taxpayer buys the gift cards, the scammer will ask the taxpayer to provide the gift card number and PIN numbers.

The IRS will never call to demand immediate payment, nor will the IRS demand the taxpayer use a specific payment method such as a gift card. Gift cards make great presents for loved ones, but they cannot be used to pay taxes.

All Taxpayers Have the Right to Appeal an IRS Decision in an Independent Forum

Office of Appeals: The IRS Independent Office of Appeals is an independent organization within the Internal Revenue Service that helps taxpayers resolve their tax disputes through an informal, administrative process. Taxpayers are entitled to a fair and impartial administrative appeal of most IRS decisions, including many penalties. Taxpayers also have the right to receive a written response regarding a decision from the IRS Office of Appeals.

Tax Court: Taxpayers who receive a statutory notice of deficiency (which is an IRS letter proposing additional tax) and who then timely file a petition with the United States Tax Court may dispute the proposed adjustment before having to pay the tax.

Federal Court: Taxpayers who miss the Tax Court deadline or whose claim for a refund is denied by the IRS may file a refund suit in a United States district court or the United States Court of Federal Claims after fully paying the tax.

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LAW OFFICE OF JAMES D. LYNCH

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(310) 289-3578 (Los Angeles)
(714) 745-3875 (Orange County)
(760) 424-4111 (Palm Springs)
(951) 465-3902 (Riverside)
(619) 326-9020 (San Diego)

[email protected]
http://www.jimlynchlaw.com

AREAS OF PRACTICE:
● Taxation
● Business Law
● Contracts & Agreements
● Wills, Trusts, and Estate Planning
● Bankruptcy & Debtor-Creditor Law
● Immigration Law
● Real Estate Law

California Wildfire Relief from the IRS

Wildfire victims in parts of California now have until Jan. 3, 2022, to file various individual and business tax returns and make tax payments. Currently, this includes Lassen, Nevada, Placer, Plumas, Tehama and Trinity counties. Any jurisdiction added to the FEMA declaration will automatically receive the IRS relief.

This relief postpones various tax filing and payment deadlines that occurred starting on July 14, 2021. As a result, affected individuals and businesses will have until Jan. 3, 2022, to file returns and pay any taxes that were originally due during this period. This means individuals who had a valid extension to file their 2020 return that ran out on Oct. 15, 2021, will now have until Jan. 3, 2022, to file. The IRS noted, however, that because tax payments related to these 2020 returns were due on May 17, 2021, those payments are not eligible for this relief.

The Jan. 3, 2022 deadline also applies to quarterly estimated income tax payments due on Sept. 15, 2021, and the quarterly payroll and excise tax returns that were due on Aug. 2 and Nov. 1, 2021.

The IRS automatically provides filing and penalty relief to any taxpayer with an IRS address of record located in the disaster area. Therefore, taxpayers do not need to contact the agency to get this relief. However, if an affected taxpayer receives a late filing or late payment penalty notice from the IRS that has an original or extended filing, payment or deposit due date falling within the postponement period, the taxpayer should call the number on the notice to have the penalty abated.

In addition, the IRS will work with any taxpayer who lives outside the disaster area but whose records necessary to meet a deadline occurring during the postponement period are located in the affected area. This also includes workers assisting the relief activities who are affiliated with a recognized government or philanthropic organization.

Individuals and businesses in a federally declared disaster area who suffered uninsured or unreimbursed disaster-related losses can choose to claim them on either the return for the year the loss occurred (in this instance, the 2021 return that is normally filed next year), or the return for the prior year (2020).

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LAW OFFICE OF JAMES D. LYNCH

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(310) 289-3578 (Los Angeles)
(714) 745-3875 (Orange County)
(760) 424-4111 (Palm Springs)
(951) 465-3902 (Riverside)
(619) 326-9020 (San Diego)

[email protected]
http://www.jimlynchlaw.com

AREAS OF PRACTICE:
● Taxation
● Business Law
● Contracts & Agreements
● Wills, Trusts, and Estate Planning
● Bankruptcy & Debtor-Creditor Law
● Immigration Law
● Real Estate Law

IRS Announces Higher Retirement Contribution Limits For 401(k)s But Not IRAs

The Internal Revenue Service announced that the amount individuals can contribute to their 401(k) plans will increase to $20,500 in 2022, up from $19,500 for 2021 and 2020. Contribution limits for 403(b), most 457 plans, and the federal government's Thrift Savings Plan also increase to $20,500. The catch-up contribution limit for employees aged 50 and over remains unchanged at $6,500. Therefore, participants who are 50 and older can contribute up to $27,000 starting in 2022.

The amount individuals can contribute to their SIMPLE retirement accounts will increase from $13,500 to $14,000. The catch-up contribution limit for employees aged 50 and over who participate in SIMPLE plans remains unchanged at $3,000.

The 2022 limit on annual contributions to an IRA remains unchanged at $6,000. The IRA catch-up contribution limit for individuals aged 50 and over remains $1,000.

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LAW OFFICE OF JAMES D. LYNCH

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(310) 289-3578 (Los Angeles)
(714) 745-3875 (Orange County)
(760) 424-4111 (Palm Springs)
(951) 465-3902 (Riverside)
(619) 326-9020 (San Diego)

[email protected]
http://www.jimlynchlaw.com

AREAS OF PRACTICE:
● Taxation
● Business Law
● Contracts & Agreements
● Wills, Trusts, and Estate Planning
● Bankruptcy & Debtor-Creditor Law
● Immigration Law
● Real Estate Law

IRS Offers Guidance for Employers Rehiring Retirees

To help address COVID-related labor shortages, the Internal Revenue Service has stated that employers generally will not jeopardize the tax status of their pension plans if they rehire retirees or permit distributions of retirement benefits to current employees who have reached the plan’s normal retirement age.

Many employers, including governmental employers (such as public school districts), are looking for ways to encourage retirees to return to the workforce and fill open positions caused by the pandemic. Employers are also looking for ways to encourage their experienced employees to stay on the job.

The IRS released two new FAQs (https://www.irs.gov/newsroom/coronavirus-related-relief-for-retirement-plans-and-iras-questions-and-answers) that are designed to offer technical guidance to public and private employers who sponsor pension plans for their employees. The FAQs highlight existing ways that employers can meet their employment objectives and still comply with the plan qualification rules.

Under the FAQs, an employer can generally choose to address unforeseen hiring needs by rehiring former employees, even if those employees have already retired and begun receiving pension benefit payments. Also, if permitted under plan terms, those employees may continue receiving the benefits after they are rehired. Moreover, an employer can generally choose to make retirement distributions available to existing employees who have reached age 59 ½ or the plan’s normal retirement age. This may assist in the retention of employees eligible for retirement.

----------------------------------------------------------

LAW OFFICE OF JAMES D. LYNCH

----------------------------------------------------------

(310) 289-3578 (Los Angeles)
(714) 745-3875 (Orange County)
(760) 424-4111 (Palm Springs)
(951) 465-3902 (Riverside)
(619) 326-9020 (San Diego)

[email protected]
http://www.jimlynchlaw.com

AREAS OF PRACTICE:
● Taxation
● Business Law
● Contracts & Agreements
● Wills, Trusts, and Estate Planning
● Bankruptcy & Debtor-Creditor Law
● Immigration Law
● Real Estate Law

The Tax Responsibilities That Come With Shutting Down a Business

● File “final” tax returns. The business must file an annual income tax return for the year it goes out of business. That income tax return should be marked as final. The last payroll tax returns for the business should also be marked as final. This communicates to the IRS that the business is closing and will no longer be filing tax returns.

● Pay taxes owed. Business owners with one or more employees must make federal tax deposits and report employment taxes on the employees’ final wages or compensation.

● Report payments to contract workers. Business owners who pay contractors at least $600 during any given calendar year (including the year in which they go out of business) must report those payments.

● Close EIN business account. After you have filed all necessary returns and paid all taxes owed, send the IRS a letter that includes the complete legal name of the business, the business EIN, the business address, and the reason you wish to close the account. If you still have a copy of the EIN Assignment Notice, you should include a copy with your letter. The IRS business account associated with the EIN will be closed, but the EIN will not be canceled. If you ever need the EIN again in the future, it will still belong to the business entity even after the account is closed.

● Keep business records. Keep all records of employment taxes for at least four years. Records relating to property should be kept until the period of limitations expires for the year in which you dispose of the property. The period of limitations is the period of time in which you can amend your tax return to claim a credit or refund, or the IRS can assess additional tax.

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LAW OFFICE OF JAMES D. LYNCH

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(310) 289-3578 (Los Angeles)
(714) 745-3875 (Orange County)
(760) 424-4111 (Palm Springs)
(951) 465-3902 (Riverside)
(619) 326-9020 (San Diego)

[email protected]
http://www.jimlynchlaw.com

AREAS OF PRACTICE:
● Taxation
● Business Law
● Contracts & Agreements
● Wills, Trusts, and Estate Planning
● Bankruptcy & Debtor-Creditor Law
● Immigration Law
● Real Estate Law

How to Avoid Fraud and Scams After a Disaster

Criminals and fraudsters often see disasters as an opportunity to take advantage of victims when they are the most vulnerable, as well as the generous taxpayers who want to help with relief efforts. These disaster scams normally start with unsolicited contact. The scammer contacts their possible victim by telephone, social media, email or in-person. Also, taxpayers might search for a charity online and be directed to a website or social media page that is not affiliated with the actual charity.

Donors should not give out personal financial information to anyone who solicits a contribution. This includes things like Social Security numbers or credit card and bank account numbers and passwords.

The Tax Exempt Organization Search (https://www.irs.gov/charities-non-profits/tax-exempt-organization-search) helps users find or verify qualified charities. Taxpayers should always contribute by check or credit card to have a record of the tax-deductible donation if they choose to give money.

----------------------------------------------------------

LAW OFFICE OF JAMES D. LYNCH

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(310) 289-3578 (Los Angeles)
(714) 745-3875 (Orange County)
(760) 424-4111 (Palm Springs)
(951) 465-3902 (Riverside)
(619) 326-9020 (San Diego)

[email protected]
http://www.jimlynchlaw.com

AREAS OF PRACTICE:
● Taxation
● Business Law
● Contracts & Agreements
● Wills, Trusts, and Estate Planning
● Bankruptcy & Debtor-Creditor Law
● Immigration Law
● Real Estate Law

What Employers Need to Know when Classifying Workers as Employees or Independent Contractors

It is critical for business owners to correctly determine whether the individuals providing services are employees or independent contractors.

Whether a worker is an independent contractor or an employee depends on the relationship between the worker and the business. An employee is generally considered anyone who performs services, if the business can control what will be done and how it will be done. What matters is that the business has the right to control the details of how the worker’s services are performed. Independent contractors normally offer their services to the public.

Misclassifying workers as independent contractors adversely affects employees because the employer’s share of taxes is not paid, and the employee’s share is not withheld. If a business misclassified an employee without a reasonable basis, the business can be held liable for employment taxes for that worker. Generally, an employer must withhold and pay income taxes, Social Security and Medicare taxes, as well as unemployment taxes.

The Voluntary Classification Settlement Program is an optional program that provides businesses with an opportunity to reclassify their workers as employees for future employment tax purposes. This program offers partial relief from federal employment taxes for eligible taxpayers who agree to prospectively treat their workers as employees. Taxpayers must meet certain eligibility requirements and apply by filing Form 8952, Application for Voluntary Classification Settlement Program, and enter into a closing agreement with the IRS.

----------------------------------------------------------

LAW OFFICE OF JAMES D. LYNCH

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(310) 289-3578 (Los Angeles)
(714) 745-3875 (Orange County)
(760) 424-4111 (Palm Springs)
(951) 465-3902 (Riverside)
(619) 326-9020 (San Diego)

[email protected]
http://www.jimlynchlaw.com

AREAS OF PRACTICE:
● Taxation
● Business Law
● Contracts & Agreements
● Wills, Trusts, and Estate Planning
● Bankruptcy & Debtor-Creditor Law
● Immigration Law
● Real Estate Law

Protect Yourself from Scammers by Knowing How the IRS Communicates

If the IRS does call a taxpayer, it should not be a surprise because the agency will generally send a notice or letter first. Understanding how the IRS communicates can help taxpayers protect themselves from scammers who pretend to be from the IRS with the goal of stealing personal information.

Here are some facts about how the IRS communicates with taxpayers:

● The IRS doesn't normally initiate contact with taxpayers by email. Do not reply to an email from someone who claims to be from the IRS because the IRS email address could be spoofed or fake. Emails from IRS employees will end in irs.gov.
● The agency does not send text messages or contact people through social media. Fraudsters will impersonate legitimate government agents and agencies on social media and try to initiate contact with taxpayers.
● When the IRS needs to contact a taxpayer, the first contact is normally by letter delivered by the U.S. Postal Service. Debt relief firms send unsolicited tax debt relief offers through the mail. Fraudsters will often claim they already notified the taxpayer by U.S. mail.
● Just because someone references an IRS notice in email, phone call, text, or social media, does not mean the request is legitimate.
● IRS revenue agents or tax compliance officers may call a taxpayer or tax professional after mailing a notice to confirm an appointment or to discuss items for a scheduled audit.
● Private debt collectors can call taxpayers for the collection of certain outstanding inactive tax liabilities, but only after the taxpayer and their representative have received written notice. Private debt collection should not be confused with debt relief firms who will call or email taxpayers with debt relief offers. Taxpayers should contact the IRS directly regarding filing back taxes properly.
● Taxpayers should remember that payment will never be requested to a source other than the U.S. Treasury.
● When visited by someone from the IRS, the taxpayers should always ask for credentials. IRS representatives can always provide two forms of official credentials: a pocket commission and a Personal Identity Verification Credential.

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LAW OFFICE OF JAMES D. LYNCH

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(310) 289-3578 (Los Angeles)
(714) 745-3875 (Orange County)
(760) 424-4111 (Palm Springs)
(951) 465-3902 (Riverside)
(619) 326-9020 (San Diego)

[email protected]
http://www.jimlynchlaw.com

AREAS OF PRACTICE:
● Taxation
● Business Law
● Contracts & Agreements
● Wills, Trusts, and Estate Planning
● Bankruptcy & Debtor-Creditor Law
● Immigration Law
● Real Estate Law

What is Earnest Money?

Earnest money is a deposit paid by a home buyer when entering into a home purchase agreement. Earnest money is typically around 1% or 2% of the home purchase price. By depositing this earnest money, the buyer is showing a good faith intent to purchase the property. The earnest money usually goes to an escrow agent (a neutral third party), who holds the money until the transaction closes.

Who gets the earnest money? If the transaction closes, the earnest money is credited towards the home purchase (i.e. it will be applied towards the closing costs and/or the down payment). If the transaction does not close, the general rule is that the seller keeps the earnest money if the buyer terminates the transaction, and the earnest money is returned to the buyer if the seller terminates the transaction. However, the terms of the contract may create certain exceptions to this general rule. For example, most contracts say the earnest money is refunded to the buyer if the buyer exercises the right to terminate during the option period.

Does the buyer get the earnest money back if the loan falls through? The contract should address this as well. If the contract is subject to the buyer obtaining financing, the earnest money will be refunded to the buyer in the event the buyer’s loan is not approved. However, if the contract is NOT subject to the buyer obtaining financing, the buyer forfeits the earnest money if the loan is not approved. This illustrates the importance of thoroughly reading a contract before signing it.

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LAW OFFICE OF JAMES D. LYNCH

----------------------------------------------------------

(310) 289-3578 (Los Angeles)
(714) 745-3875 (Orange County)
(760) 424-4111 (Palm Springs)
(951) 465-3902 (Riverside)
(619) 326-9020 (San Diego)

[email protected]
http://www.jimlynchlaw.com

AREAS OF PRACTICE:
● Taxation
● Business Law
● Contracts & Agreements
● Wills, Trusts, and Estate Planning
● Bankruptcy & Debtor-Creditor Law
● Immigration Law
● Real Estate Law

Form 5564 Notice of Deficiency Waiver

If the IRS believes that you owe more tax than what was reported on your tax return, the IRS will send a Notice of Deficiency explaining the additional tax due and how the amount was calculated. Included with the Notice of Deficiency will be Form 5564, Notice of Deficiency Waiver, which the IRS asks you to sign and return to them.

If you disagree (either partially or completely) with the proposed additional tax due, then you should NOT sign Form 5564. Form 5564 should be signed and returned to the IRS only if you fully agree with the additional tax due.

Taxpayers who disagree with the additional tax assessment have 90 days (or 150 days if the taxpayer lives outside of the U.S.) to resolve the matter. There are no extensions to the ninety-day window. As a first step, you may want to submit a letter to the IRS stating why you disagree with the notice, and include with your response copies of any documentation supporting your position. If you have not been able to resolve the matter with the IRS and the ninety-day window is close to expiring, you will want to submit a petition to Tax Court to challenge the deficiency assessment.

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LAW OFFICE OF JAMES D. LYNCH

----------------------------------------------------------

(310) 289-3578 (Los Angeles)
(714) 745-3875 (Orange County)
(760) 424-4111 (Palm Springs)
(951) 465-3902 (Riverside)
(619) 326-9020 (San Diego)

[email protected]
http://www.jimlynchlaw.com

AREAS OF PRACTICE:
● Taxation
● Business Law
● Contracts & Agreements
● Wills, Trusts, and Estate Planning
● Bankruptcy & Debtor-Creditor Law
● Immigration Law
● Real Estate Law

What is the Difference Between a Conservatorship and a Guardianship?

There is typically some confusion about the difference between a conservatorship and a guardianship. Part of this confusion is due to the fact that the two terms have different meanings in different states.

For example, in Arizona a guardianship gives a person control over another person’s day-to-day decisions (such as decisions about living arrangements and healthcare), whereas a conservatorship provides a person with the authority to control another person's financial decisions. In California, guardianship is the term used regarding the care of a minor, while conservatorship applies to the care of an incompetent or incapacitated adult.

In Texas, the term conservatorship refers to what other states call “child custody.” In other words, conservatorship deals with the question of how parents who are no longer married should exercise their rights and responsibilities to their child(ren). There are three types of conservatorships in Texas:

● Joint Managing Conservatorship: both parents share decision-making about the child.
● Sole Managing Conservatorship: one parent has the exclusive right to make decisions about the child.
● Possessory Conservatorship: If one parent is named sole managing conservator, the other parent is a possessory conservator. The possessory conservator has visitation rights but no decision-making rights.

Guardianships in Texas can refer to the care of either a minor child or incapacitated adult. There are two types of guardianships in Texas:

● Guardianship of the Person: A guardian of the person is responsible for decisions about healthcare provisions and living arrangements of the minor child or incapacitated adult.
● Guardianship of the Estate: A guardian of the estate is responsible for decisions about the property and financial affairs of the minor child or incapacitated adult.

----------------------------------------------------------

LAW OFFICE OF JAMES D. LYNCH

----------------------------------------------------------

(310) 289-3578 (Los Angeles)
(714) 745-3875 (Orange County)
(760) 424-4111 (Palm Springs)
(951) 465-3902 (Riverside)
(619) 326-9020 (San Diego)

[email protected]
http://www.jimlynchlaw.com

AREAS OF PRACTICE:
● Taxation
● Business Law
● Contracts & Agreements
● Wills, Trusts, and Estate Planning
● Bankruptcy & Debtor-Creditor Law
● Immigration Law
● Real Estate Law

What is backup withholding?

Businesses who pay nonemployee compensation of $600 or more for the year must report these payments to the IRS using Form 1099-NEC, Nonemployee Compensation. The business generally does not withhold taxes from such payments. However, there are situations when the business is required to withhold a certain percentage of tax from these payments in order to ensure the IRS receives the tax due. The business's requirement to withhold taxes from payments not otherwise subject to withholding is known as backup withholding.

For example, nonemployee compensation may be subject to backup withholding if a payee has not provided a Taxpayer Identification Number (TIN) to the payer or the IRS notifies the payer that the payee provided a TIN that does not match their name in IRS records. Backup withholding can also apply to other types of payments reported on Forms 1099 (e.g. 1099-INT, 1099-DIV, etc.) as well as Form W-2G (gambling winnings).

The current backup withholding tax rate is 24%. The business withholds this 24 percent tax from the payee’s compensation, and the business must file Form 945 annually to report all backup withholding for all payees for the year. Generally, the tax deposit rules for Form 945 are the same as those for Form 941 (payroll taxes).

A payee can stop backup withholding by correcting the reason for becoming subject to backup withholding. This can include providing the correct TIN to the payer, resolving the underreported income, paying the tax owed, or filing the missing return(s), as appropriate.

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LAW OFFICE OF JAMES D. LYNCH

----------------------------------------------------------

(310) 289-3578 (Los Angeles)
(714) 745-3875 (Orange County)
(760) 424-4111 (Palm Springs)
(951) 465-3902 (Riverside)
(619) 326-9020 (San Diego)

[email protected]
http://www.jimlynchlaw.com

AREAS OF PRACTICE:
● Taxation
● Business Law
● Contracts & Agreements
● Wills, Trusts, and Estate Planning
● Bankruptcy & Debtor-Creditor Law
● Immigration Law
● Real Estate Law

How much is an S-corporation taxed?

The simple answer is: there is no federal income tax levied on an S-corporation. S-corporations are pass-through entities. An S-corporation files a business tax return (Form 1120-S) to report the profit it generated for the year, but this profit is not subject to any tax rate. Instead, the profit is passed through to its owner, who then reports that profit on the personal income tax return (Form 1040) and pays regular income tax on that business income (as well as any other income the taxpayer received). If the S-corporation has more than one owner, the profit reported on Form 1120-S is allocated among the owners in proportion to their percentage ownership interest in the S-corporation.

However, an S-corporation may be subject to other types of taxes:

● Payroll taxes: an S-corporation must pay employment taxes on its employees’ compensation. The S-corporation must withhold its employees’ federal and state income taxes, pay Social Security and Medicare taxes, and pay unemployment taxes. In addition, the IRS requires owners of an S-corporation to designate a "reasonable" amount of profits as salary, meaning the S-corporation owners will also be subject to Social Security and Medicare taxes on this salary. S-corporation owners do not pay Social Security and Medicare taxes on business profits except that portion that is designated as salary, so this is advantageous compared to sole proprietorships and partnerships who must pay Social Security and Medicare taxes on their entire business profit.

● Property taxes: If the S-corporation owns real property, the S-corporation must pay property taxes on this property.

● Sales tax: S-corporations are required to pay state sales taxes in the same manner as other purchasers.

● State taxes: In some states, S-corporations must also pay additional fees and taxes. For example, in California, an S-corporation must pay tax of 1.5 percent on its income with a minimum annual amount of $800.

----------------------------------------------------------

LAW OFFICE OF JAMES D. LYNCH

----------------------------------------------------------

(310) 289-3578 (Los Angeles)
(714) 745-3875 (Orange County)
(760) 424-4111 (Palm Springs)
(951) 465-3902 (Riverside)
(619) 326-9020 (San Diego)

[email protected]
http://www.jimlynchlaw.com

AREAS OF PRACTICE:
● Taxation
● Business Law
● Contracts & Agreements
● Wills, Trusts, and Estate Planning
● Bankruptcy & Debtor-Creditor Law
● Immigration Law
● Real Estate Law