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Tax Questions/Answers

By: Tax Hotline
Summer 2021 (Vol. 39, No. 2)

Q: I was laid off last year and have been earning money doing odd jobs. For the first time in my life I have not had taxes withheld. Should I be paying estimated taxes?

A: That depends. If you expect to owe $1,000 or more in taxes for this year, the IRS will expect you to make quarterly payments.

For estimated tax purposes, a year has four payment periods. Taxpayers must make a payment each quarter. For most people, the due date for the first quarterly payment is April 15. The next payments are due June 15 and Sept. 15, with the last quarter’s payment due on Jan. 15 of the following year.

Individuals, sole proprietors, partners and S corporation shareholders generally use the worksheet in Form 1040-ES PDF. Taxpayers can pay online, by phone or by mail. The Electronic Federal Tax Payment System and IRS Direct Pay are two easy ways to pay. EFTPS keeps a record of payments, so users can see how much they paid and when.

If a taxpayer underpaid their taxes, they may have to pay a penalty. In general, taxpayers don’t have to pay a penalty if they meet any of these conditions:

They owe less than $1,000 in tax with their tax return, or...

Throughout the year, they paid the smaller of these two amounts: at least 90 percent of the tax for the current year or 100 percent of the tax shown on their return for the prior year – this can increase to 110 percent based on adjusted gross income.

To see if they owe a penalty, taxpayers should use Form 2210 PDF. The IRS may waive the penalty if someone underpaid because of unusual circumstances and not willful neglect.

Q: I am starting a small business and will have four employees. What payroll taxes will I be responsible for?

A: Federal law requires most employers to withhold federal taxes from their employees’ wages. You will need to start with your employee’s W-4 and the withholding tables described in Publication 15, Employer’s Tax Guide. Most employers also withhold social security and Medicare taxes from employees’ wages and deposit them along with the employers’ matching share. Employers report and pay Federal Unemployment Tax (FUTA) separately from other taxes. Employees do not pay this tax or have it withheld from their pay. Businesses pay FUTA taxes from their own funds.

Generally, employers pay employment taxes by making federal tax deposits through the Electronic Federal Tax Payment System (EFTPS). The amount of taxes withheld during a prior one-year period determines when to make the deposits. Publication 3151-A, The ABCs of FTDs: Resource Guide for Understanding Federal Tax Deposits and the IRS Tax Calendar for Businesses and Self-Employed are helpful tools.

Generally, employers report wages and compensation paid to an employee by filing the required forms with the IRS. E-filing Forms 940, 941, 943, 944, and 945 is an easy, secure, and accurate way to file employment tax forms. Employers filing quarterly tax returns with an estimated total of $1,000 or less for the calendar year may now request to file Form 944, Employer’s ANNUAL Federal Tax Return once a year instead. At the end of the year, the employer must provide employees with Form W-2, Wage and Tax Statement, to report wages, tips, and other compensation. Small businesses file Forms W-2 and Form W-3, Transmittal of Wage and Tax Statements, with the Social Security Administration and, if required, state or local tax departments. Business owners can make things a little easier on themselves by filing payroll and employment taxes electronically.

Employers submitting the forms themselves will need to purchase IRS-approved software. There may be a fee to file electronically. The software will require a signature in one of two ways. The first way is by scanning and attaching Form 8453-EMP, Employment Tax Declaration for an IRS e-file Return. The second is to apply for an online signature PIN. Taxpayers should allow at least 45 days to receive their PIN. The software will prompt the user on the steps needed to request the PIN.

Q: I don’t usually need to file an income tax return. How do I sign up for the monthly Advance Child Tax Credit payments?

A: An online Non-filer Sign-up tool went live on the website on July 15 to help you. This tool provides a free and easy way for eligible people who don’t make enough income to have an income tax return-filing obligation to provide the IRS the basic information needed—name, address, and Social Security numbers - to figure and issue their Advance Child Tax Credit payments. People who did not file a tax return for 2019 or 2020 and who did not use the IRS Non-filers tool last year to register for Economic Impact Payments can also use this tool.

Q: How can I cancel an Employer Identification Number (EIN) that I no longer use?

A: The IRS cannot cancel your EIN. Once an EIN has been assigned to a business entity, it becomes the permanent Federal taxpayer identification number for that entity. Regardless of whether the EIN is ever used to file Federal tax returns, the EIN is never reused or reassigned to another business entity. The EIN will still belong to the business entity and can be used later, should the need arise.

However, If you receive an EIN but now no longer need it, the IRS can close your business account. To close your business account, send a letter that includes the complete legal name of the entity, the EIN, the business address and the reason you wish to close your account. If you have a copy of the EIN Assignment Notice that was issued when your EIN was assigned, include that and mail to:

Internal Revenue Service
Cincinnati, Ohio 45999

If you applied for an EIN for an exempt organization that (1) never applied for formal exemption, (2) is not covered in a group ruling, or (3) never filed an information return, you may fax a request to close your account to (855) 214-7520) or send a letter to:

Internal Revenue Service
Attn: EO Entity
Mail Stop 6273
Ogden, UT 84201

Q: I build furniture for fun in my spare time. If I sell some of my work, can I deduct the equipment and expenses on my taxes?

A: That depends. Do you make furniture as a hobby or a business? You can claim a deduction if you turn your hobby into a business. A hobby is any activity you pursue and enjoy with no intention of making a profit. The IRS defines a business as “the intent to make a profit”. Here’s some key differences:

  • Whether the activity is carried out in a businesslike manner and the taxpayer maintains complete and accurate books and records.

  • Whether the time and effort the taxpayer puts into the activity shows they intend to make it profitable.

  • Whether they depend on income from the activity for their livelihood.

  • Whether any losses are due to circumstances beyond the taxpayer’s control or are normal for the startup phase of their type of business.

  • Whether they change methods of operation to improve profitability.

  • Whether the taxpayer and their advisors have the knowledge needed to carry out the activity as a successful business.

  • Whether the taxpayer was successful in making a profit in similar activities in the past.

  • Whether the activity makes a profit in some years and how much profit it makes.

  • Whether the taxpayers can expect to make a future profit from the appreciation of the assets used in the activity.