Ten Year-End Tax Saving Strategies – Act Before December 31! – from NATP

Treasury and IRS Finalize Rules Regarding Roth 401(k) Contributions

Feds still have permanent injunction against promoter of “Tax Toolbox” scheme to deduct personal costs as business expenses.

 The Gain And Pain Of Sarbanes-Oxley

Getting Fired… and Fired Up About Taxes

Q:

Subject: One question on out-of-state business

 

Hi,

TaxGuru.org has wealth of information.  However, I could not find information on one of my question.  Can you please provide an answer to this following question?

I am Single-Member LLC incorporated in Florida and have the approval of IRS for treating as S-Corporation. Income for my S-Corporation for this year 2005 is fully sourced from Pennsylvania. For Pennsylvania, basically, my business is out-of-state S-Corporation.  My S-Corp gets 1099 from a company in PA.

Assuming that S-Corporation receives 1099 income of $150,000 from PA and me as an employee of S-Corporation receiving a salary of $100,000, I would like to know the tax implications. Let us also assume another 10,000 towards qualified business expenses.

Am I supposed to pay Pennsylvania state tax for my W2 income of $100,000 and business income of 40,000? Can we treat $100,000 salary as Florida Income because it is paid by LLC/S-Corp in Florida and I am also resident of Florida?  In this case, I need to pay PA State tax only on $40,000 income.

Thanks,

A:

You really should be discussing this with your own personal tax advisor.  If you are trying to operate an LLC or S corp without a professional tax advisor, you are asking for big trouble.  This is even more critical when operating in more than one state because the rules for reporting and taxation by each state are different.

Just from the sketchy details you provided, it is apparent that you will have to file an S corp return in PA, as well as a nonresident individual return to report and pay tax on the S corp income passed through to you on the K-1.  How much, if any, of the $100,000 W-2 income is taxable to PA will most likely depend on how much time you spent working inside PA.  There will also be the issue of PA payroll taxes if it is determined that any of your W-2 pay was earned there.

A good tax pro should be able to help you stay in proper compliance with the PA tax authorities.

Good luck.

Kerry Kerstetter

 
Follow-Up:

Kerry,

 

Thank you very much for your response.  I do have a CPA, but he is not familiar with PA taxes.  Looks like I have to check up with some one in PA who are familiar with PA Taxes.

Your input is vary valuable and thanks again for replying me.

Regards,

 
My Reply:

Nobody knows everything about all of the states’ tax laws.  However, a good tax advisor will know how to research the rules for any one particular state so that you don’t have to hire a different tax pro for each one.  The fundamental concept of income-sourcing is fairly consistent in most states; so that only the finer details usually need to be determined for a particular state.

The best place to start is from the SisterStates.com website to take you and your professional advisor to the state’s official website.  QuickFinders and Tax Materials, Inc. both have very fine reference books covering the various states’ tax issues.  These are what I use when one of my clients either moves to a new state or becomes in other ways required to file tax returns with a new state.

Good luck.

Kerry Kerstetter

 

The Informed Consumer’s Guide to Hiring a Tax Professional – From NATP

So, you want to learn Bookkeeping – Free online tutorial courtesy of Bean Counter Dave Marshall.  It’s a very good idea to understand the basic fundamental principles of accounting, even when working with QuickBooks.

Without a doubt, the most time consuming tax returns are those where the clients have been doing a lot of stock and option trading.  Entering the individual trades into the tax program for Schedule D takes hours and hours.  Luckily, Sherry has been able to enter most of those into Lacerte; but even with her much lower billing rate than mine, the clients’ bills are in the several thousand dollar range for their 1040s.

While it hadn’t been officially blessed by our masters at the IRS, some tax preparers were short-cutting the detailed entry process and just entering summary totals into Schedule D with backup detailed stockbroker reports either attached or “available upon request.” 

With the 2005 Schedule D, it looks like IRS will no longer accept such summary entries on Schedule D and is insisting on each individual trade being entered.  Last night, I downloaded and listened to a very informative podcast from CPA Ed Zollars, where he goes into great detail on this not new, but much more explicit requirement by IRS.  He shares the fears of some tax pros that not including all of the specific trade details could cause IRS to refuse to accept a 1040 as being properly filed.

Links:

Ed Zollar’s mp3 podcast on Schedule D instructions

Ed Zollar’s main podcast page

RSS feed to subscribe to Ed Zollar’s podcasts 

 

Q:

Subject: Roth 401(k) plans

Mr. Kerstetter,
I am an accounting student pursuing my MBA with a focus in Accounting, satisfying my CPA 150 hour requirement. As a young professional I have been keeping my eye on retirement. So I can get out young and rich! I see there is a new retirement plan coming out Jan. 1, 2006 the Roth 401(k) plan. Unfortunately my company doesn’t offer it for 2006. But I had some questions regarding it. The Roth 401(k) plan, is made with after tax dollars and employer matches are made with before tax dollars. Being that we are taxed on these dollars, does the share of taxes paid by our employer increase with the Roth 401(k)?

As I have learned in my tax classes, Employers pay taxes based on their payroll. They pay federal income tax, social security and Medicare, and federal unemployment taxes.

I am under the impression that because traditional 401(k) plans lower our AGI, that because we aren’t responsible for tax on contributions, that our employer isn’t either.

If this new Roth 401(k) plan contributions are based on after tax dollars, doesn’t offering this plan increase an employers tax liabilities? If so, what is the motivation to them to adopt this retirement plan?

Your site is great! I read it everyday thanks for the knowledge and inspiration in my journey.

A:

Roth 401(k)s are obviously so new that all of the details of how they function in real life are not yet settled.  Some of the basics are laid out in this free article from the WSJ.

I noticed a few misconceptions in your email.  Employers do pay a number of payroll taxes on the wages they pay their employees.  These include FICA, Medicare and Federal and State Unemployment taxes, plus occasional local taxes.  Employees are also required to pay FICA and Medicare taxes on their gross pay.

The employer does not actually pay Federal or State income taxes on the wages paid out.  Those are paid by the employees, but are withheld by the employer to be sent to the IRS and State on behalf of the employees.

My understanding of the Roth 401(k) plans is that the amounts put aside into the accounts by the employees will be subject to all of the standard income and payroll taxes by both the employer and employee.  The money being contributed to the account is thus after-tax dollars.  The benefit to the employee is that, if the money is in the account long enough and our rulers in DC don’t change the laws, all of the money in those accounts can be withdrawn tax free, including the income it earns over the years.

With the conventional 401(k)s, the employees don’t have to report the amounts contributed as subject to income taxes, but do have to pay payroll taxes on that money, as do the employers.  The trade-off here is that every bit of money taken out of the 401(k) or subsequent rollover IRA account will be subject to income tax when withdrawn.  

In regard to employer full or partial matching of employee contributions, these amounts are not currently subject to income taxes, but are hit with the normal payroll taxes.  While these are technically pre-tax dollars in conventional 401(k)s, I don’ think that will be possible with the new Roth 401(k)s.  Those are only designed to be funded with after-tax dollars. I haven’t studied the actual law; but it wouldn’t be consistent for our rulers to allow a mixing of pre-tax and after-tax contributions.

401(k)s of both types are generally very popular with employers because they allow their employees to fund their retirement accounts with their own money rather than additional company funds, as normal company sponsored pension plans require.  In a competitive labor market, employers want to allow their workers the same kinds of benefits that their competitors have in order to attract and retain productive people.

I hope this helps understand this issue a little better.

Kerry Kerstetter

Follow-up:

Wow, Mr. Kerstetter, thank you for the great response. I am not sure how you do it, I guess my problem was a misunderstanding that employers don’t pay anything on our traditional 401k contributions. What I have seen from a couple Roth 401k calculators found on smartmoney.com is that the employer match is put in as before tax dollars. I am not sure how they plan on handling the mixed distribution of those. But thank you for your response again!

Update:

Roth 401(k) Offers Tax-Free Bonanza in Retirement – From John Wasik of Bloomberg News.